rlier, I criticized Treasury Secretary’s Geithner’s bank bailout plan. More specifically, I called on him to resign before he embarrasses Obama even more. The plan still lacks a lot of detail but here are my thoughts on the four major points.
Step 1: More capital support for banks, until these banks can raise private capital.
This isn’t much of a surprise, seeing as recapitalization was the primary purpose of the first $350 billion doled out to banks. It’s a good idea in theory, as long as the banks use that money to start lending again instead of hoarding it or making more acquisitions. The goal, after all, it to spur lending–not just boost liquidity.
Step 2: A private investment fund of between $500 billion and $1 trillion, designed to entice private capital back to banks.
A nice thought, but as of yet there’s no way to tell if this is just a pipe dream or a real plan. Since the government cannot figure out how to value the toxic assets weighing down financial firms, it will presumably entice private investors to do so. But that’s a tall order because the government has so far refused to offer any guarantee on the assets or a promise to share in the losses. This is where Geithner’s murky delivery sunk the bailout plan. Without any details on how to make this public-private scheme work, investors have to assume that the program won’t happen and things will remain the same. Obviously the status quo isn’t something we want to maintain, so I hope more details on this front emerge soon.
Step 3: Improvements to the way consumer debt and small business loans are bundled to inspire confidence in these assets.
This step, on the other hand, was both realistic and well-received. Securitized debt that bundled toxic subprime mortgage with other loans was a prime culprit in sparking the credit crisis. More transparency in these bundles going forward will help improve confidence. Still, this step fails to do anything to help remove the current weight of bad debt that’s currently crushing the financial system.
Step 4: Stimulate home leading and help homeowners through refinancing and workouts.
Though mainly a political move to win points with voters, this final step of the bailout package will have some impact on housing. The bottom line is that too many people have mortgages they can’t afford and banks have too much bad debt as a result. This is an effort to help some of that.
In a nutshell, these aren’t bad ideas–they’re just short on details. Geithner and Obama need to work to calm the markets down. On Tuesday, the president will address a joint session of Congress. I hope he takes this opportunity to give us more details on his administration’s plans.