Geithner’s Plan Still Light On Key Details


We await details of Tim Geithner’s banking fix. Overall, the plan appears to be similar to Bush’s plan, but bigger.

Early briefings do suggest one helpful element: A detailed review of the financial health of every bank that includes an analysis of future losses.  Done properly, this could identify zombie banks and force the government to deal with them.

Geithner’s plan is apparently still short on details, which suggests that he hasn’t figured out how to solve the key problem: secretly recapitalizing banks at taxpayer expense without it being obvious that that’s what he’s doing.  The fix is said to involve a combination of guarantees (taxpayers take any losses) and cheap financing.  If so, this just spreads the taxpayer gift to the buyers as well as the banks.

Here are the key elements, per Dow Jones and the New York Times:

  • Additional capital injections into banks. Dow Jones: “The capital infusions would be coupled with a comprehensive review of institutions to measure their financial health, including an analysis of expected future losses at the institutions. The results of those stress tests would help determine which firms would receive government funds.”
  • Trash asset removal (combo government and private capital).  Initially $250-$500 billion, eventually as much as $1 trillion.  Thought to involve guarantees and low-cost financing to induce private investors to play ball. 
  • Foreclosure prevention.  $50-$100 billion, no details.
  • Vast increase in TALF to $500 billion – $1 trillion (the asset-purchase plan designed to pull down rates on consumer lending products)

The WSJ has more details on the “stress test” examinations.  Again, the key to success is to identify the zombie banks and let them fail, while providing capital to the solid banks:

WSJ: Many U.S. banks will be subjected to rigorous examinations to see if they are healthy enough to lend before receiving additional financial aid, according to people familiar with the matter… The new bank examinations are designed to ensure that banks that are in need of money but still healthy enough to lend, receive cash. The examinations will be mandatory for banks with assets exceeding $100 billion.

The move could address disagreements between bank regulators about the viability of scores of institutions. Regulators have struggled to come up with a common set of criteria for deciding which banks should receive money. Setting up a stress test could create a more objective set of standards, which might reveal the depths of the industry’s problems.

Banks have complained that the process for applying for bailout funds is arbitrary. At least two that applied, National Bank of Commerce in Illinois and County Bank in California, were denied by the government and failed. Research firm RBC Capital Markets estimated Monday that more than 1,000 banks could fail in the next three to five years, more than triple its previous estimates.

Mr. Geithner will also unveil a host of new conditions for banks that receive government aid, including requiring that firms show how the money is being spent and how funds are helping to generate new lending. Banks must show how many new loans they provided with the assistance and how many assets they purchased. They must also agree to implement foreclosure mitigation programs, curb executive pay and not use the funds to purchase healthy banks until the government money is repaid.

See Also: Time For CNBC to Drop The Cramer Charade