The collective groan emitted by markets following the announcement of the Geithner Asset Relief Program (a.k.a., GARP) stems primarily from unmet expectations. Ultimately, investors have been left wanting, and that may be the result of their own lofty hopes and the ongoing chatter about the plan reported by major newspapers (including this one) that boosted the market’s optimism.

This visceral, knee-jerk response, over time, will be replaced by a more substantive reaction to the various aspects of the plan, some of which were cautiously applauded by observers, others dismissed as another run-through of the endless promises from previous Treasury Secretary Hank Paulson.

“There’s a huge crisis of confidence that’s not going to be over anytime soon — we’re still seeing 500,000 to 600,000 people per month lose their jobs and we’re seeing the credit markets tighten up — the broader ideas could be good but would be good to see a plan to implement them,” says Dan Cook, senior market analyst at IG Markets.

Here is a quick breakdown of the facets of GARP, and the general feelings regarding them:

  • The bank “stress test”. Mr. Geithner’s plan includes a “forward looking comprehensive ’stress test’” that will assess whether particular lending institutions have the capital to continue lending or not — and then the Treasury could take stakes in the form of preferred investments. This is the most intriguing part of the plan, according to several observers, but many wanted to know whether these stress tests would potentially determine that certain banks were indeed too sick to continue. Such rigor would further the process of restoring the financial system. “Smaller institutions that fail will be seized and sold by the FDIC without major systemic impact, although an RTC-type initiative may prove necessary to liquidate their assets,” writes Daniel Alpert and Len Blum, managing directors at Westwood Capital. “And larger institutions with stressed capital shortfalls too great to justify their survival as independent entities should likewise be folded in to healthier ones.” Mr. Cook added that such a test, if strong enough, could spur the market along as investors do their own form of arbitrage, investing in the healthier ones, ignoring the disasters.
  • Trading

  • The Public/Private Investment Fund: The idea behind this is to use public financing to leverage private capital, starting with $500 billion, and potentially as much as $1 trillion. This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion. The idea here is not to put in any more public money, as much of the $350 million remaining in the GARP, would be used for this initiative. The problem, of course, is the exact one that bedeviled many for months — how does one get private equity involved? “How will the bad assets be priced?” wonders Doug Kass, president of Seabreeze Partners Management. “How will government entice the private sector to buy the assets?” And round and round we go.
  • Housing

  • Support for the Housing Market: The Treasury and Federal Reserve would continue the efforts to buy up mortgage-backed securities and GSE debt; this program has so far been successful in pushing down mortgage rates. That’s been a boon for those who have refinanced (mostly people who don’t need it, but will enjoy the savings anyway). But the Treasury also wants to commit $50 billion to prevent avoidable foreclosures. That’s may work, but is unfortunately in conflict with the previous aspect of the plan — it makes pricing these assets all the more difficult. Once again, that seems to lead to the earlier conclusion — either the Treasury overpays and gets the banks out of the mess, or just takes over and liquidates.
  • Expanding the Term Asset-Backed Securities Lending Facility: This was announced previously at $200 billion, and will now be, perhaps, up to $1 trillion, reaching clear into Dr. Evil territory. Again, the criticism here relates to details — or lack thereof. “The Fed today said that it would announce the date at which the TALF would commence,” writes Tony Crescenzi, bond market strategist at Miller Tabak. “In other words, whereas expectations previously were that the TALF would be implemented in February, the Fed said today it would only announce the date it would commence. Missing also from the TALF announcement is the details of it, with market participants still unsure of how it will work.”
  • More transparency and oversight: This is of course welcome, but it remains to be seen how it will be implemented.