The Geithner/Paulsen plan

I have to admit it. I really hoped and even thought maybe Obama would and could change things. But the new plan to save the banks that Geithner presented on Tuesday is basically the same thing as Bush/Paulsen's plan. No details. Give the banks money. And one more thing, "Transparency." But it is basically just a government-backstopped credit call option available to private investors, that exposes taxpayers to even further losses presuming asset market prices are artificially high.

Why won't the government just let the market determine a value on its own? Yes we know it will not be pretty, but as long as government tries to claim that all these mortgage backed securities are worth what people paid for them, this sinkhole will just get bigger and bigger. Printing money only leads to inflation. And at the rate Geithner is accelerating matters (this plan will cost $2 Trillion after Paulsen's failed $700 billion plan), we are looking at some serious hyper-inflation.

The problem is nobody is sure who is solvent and who is not. Can GM survve? Starbucks? Citibank? Your neighbor? When the governmentjust props them all up and won't let any of them fail, then nobody is going to loan anybody any money. Which means no new buildings, no new business to pick up where things are falling. No new jobs to help those in need pay for their rent. And eventually no food on the shelves of the local grocery store. And not enough money to buy what is on the shelf.

I know it is hard to believe that is where we are headed. Take a trip to Best Buy and it all looks the same as two years ago. And inflation? I must be crazy. Have you seen the price of a car lately? Or gasoline? I know I know. Prices are going dOWNN. And for now they are. But believe me, our government's policies are taking us down a dangerous road. Much more dangerous than the also painful road of raising taxes, raising interest rates, and letting banks fail or even nationalizing them. No self respecting Republican or Democrat seems to agree with me (except Ron Paul)

Obama says we need bold moves, but is not delivering them.

Here is Goldman Sachs' research department on the "new" Geithner plan:

KEY POINTS:
1. As expected, the Treasury's financial rescue plan will work within the constraints of existing TARP funding (of which about $350bn remains), attempting to catalyze private sector funds to purchase bad assets and restart the securitization process. However, the speech and accompanying fact sheet leave open many questions about the timing of these interventions and the terms of asset purchases and recapitalization. Much of the program clearly remains to be worked out over the coming weeks and months.
2. Bank stress test. A key feature of the program will be a "stress test" for all banks with assets >$100bn. This will be used to determine which banks need to be recapitalized, or shut down. However, details on the exact nature of the stress test are scant. The Treasury will make additional TARP funds available to purchase convertible preferred shares that will be converted to common "if needed to preserve lending in a worse-than-expected economic environment."
3. Public/private bad bank. Rather than a fully government-funded bad bank, the Treasury will attempt to catalyze private sector investment via a "public-private partnership." This will start at “up to” $500 bn in size, and potentially expand to $1 trn. It is clear from Geithner's remarks that this is a concept at this point, rather than a fully designed entity -- Geithner mentioned getting public comment on the potential structure. Supposedly, private sector investors will determine the prices (perhaps with the benefit of cheap financing or partial loss protection from the government).
4. TALF expansion. As leaked repeatedly prior to the speech, the Fed's Term Asset-Backed Securities Lending Facility will be scaled up by a factor of five to $1 trillion and expand to backing CMBS and possibly RMBS. The goal here is to restart securitizations and thereby expand the flow of new lending (this is not an approach to deal with bad assets). While potentially an innovative approach to restarting securitization, it remains to be seen how effective this program will be. The Treasury's commitment to this would be $100bn rather than the $20bn currently earmarked and would be drawn from the $350bn remaining in TARP.
5. Transparency and accountability provisions. Not many surprises here, though it bears emphasis that the provisions apply to new extensions of aid rather than to those already supplied. Institutions that accept new help will be required to pay only $0.01 per quarter in dividends, refrain from purchasing shares and from pursuing new acquisitions. Geithner also outlines a number of additional reporting requirements intended to keep the pressure on institutions to make new loans.