Tuesday, March 24, 2009

The Geithner Plan: FT Alphaville summary of media responses

Across the FT and the blogosphere, responses to the US Treasury’s Public-Private Investment Program:

FT editorial comment:
No one knows whether the market malfunction is due more to long-term losses or short-term liquidity risk. A virtue of this plan is that it should help us find out. But this is a gamble, which could fail in two ways. Even with subsidies, too few trades may take place, leaving the assets with the banks. And if private investors do take the subsidised risk, the assets may yet cause large losses for Congress to pay. Either failure would erode the administration’s authority further. Its plan may just work. If it does not, much more than the US banking system is at risk.

FT - Short View, John Authers:
Will this be the rally that ends the bear market? The critical issue is whether the Treasury’s plan works. The initial enthusiasm of several large asset managers to be involved yesterday helped drive the market’s positive reception. But the plan assumes, like its predecessors, that the basic problem is one of liquidity. It aims to put a price on securities that are not trading. If the problem is really one of solvency - that current prices for these assets are accurate - the gains will not be durable.

FT - Lex:
After lambasting past announcements for being too broad brush, it is churlish to accuse Tim Geithner, US Treasury secretary, of obscuring his latest taxpayer-funded giveaway with excessive detail. In fact, the latest plan to cleanse the system of bad assets is appropriately nuanced. It is better crafted, using private involvement to lessen taxpayer risk. And there is the odd nice touch, like using a portion of fees to bolster deposit insurance funds. A tougher regulatory stick is needed to force banks to face reality. Instead, generous terms may help bridge the pricing gulf – further reason for investors fearful of a political backlash to stay clear.

FT - Gillian Tett:
On paper, at least, there is certainly reason to feel more hopeful than with earlier schemes. If nothing else, this plan shows that Mr Geithner and his “team” (insofar as he has one) understand the root of the problem – namely, the inability of banks to lance the poisonous boil created by their toxic-cum-“legacy” assets… But in the last resort, the real test will be whether tangible deals are done, or not. The clock on Mr Geithner – and the system – is ticking.

WSJ, editorial comment:
The best news about the new Treasury bad bank asset purchase plan is that Secretary Timothy Geithner has finally settled on a strategy. The uncertainty was getting almost as toxic as those securities. Now all Mr. Geithner has to do is find private investors willing to “partner” with the feds (Congress!) to bid for those rotten assets, coax the banks to sell them at a loss, and hope that the economy doesn’t keep falling lest taxpayers lose big on their new loan guarantees. Other than that, General, how was the siege of Moscow?… This isn’t the worst idea the federal government has ever had, and if it works it will help banks take their losses and burn down debt.

Breaking Views, Roger Beales:
Tim Geithner needed a credible and detailed “bad bank” plan this time round. The besieged US Treasury secretary has delivered. There are some niggling problems. But it appears more feasible than anything previously announced.

NYT, Paul Krugman:
Leave on one side the question of whether the Geither plan is a good idea or not. One thing is clearly false in the way it’s being presented: administration officials keep saying that there’s no subsidy involved, that investors would share in the downside. That’s just wrong. Why? Because of the non-recourse loans, which reportedly will finance 85 percent of the asset purchases.

New Yorker, James Surowiecki:
I think the costs of nationalization likely outweigh the benefits, and that in any case it would be very difficult for Obama to get Congress to authorize the trillion dollars or more the government would need to take over America’s biggest banks. And I agree with [Mark] Thoma [of Economist’s View] that the Geithner plan could work. But what I like best about his conclusion is something else: his implicit recognition that the people who came up with this plan — Geithner, Larry Summers, and Ben Bernanke — are well-versed in the problems of the banking system and serious about trying to solve them, rather than being either oblivious or corrupt.

Business Insider, Henry Blodget:
Geithner’s plan will use private investors to set the prices, but they aren’t market prices. Rather, they will be highly subsidized above-market prices…These above-market prices, of course, will encourage banks to sell crap assets…and protect them from being rendered worthless as a result. Thus, it will secretly recapitalize them at taxpayer expense… the government is in effect giving investors a put option to sweeten the deal.

American Prospect, Ezra Klein:
And it’s not clear to me that any of the reasons [that Geithner would want private investors in the market] justify the amount we’re paying private investors to involve themselves. But it’s possible that the pricing function that’s being sold as the primary reason for private involvement is not, in fact, the primary reason for private involvement. After all, the government looks to be doing a lot of the pricing itself.

Bronte Capital, John Hempton:
What I like about the Geithner plan is that it provides PRICE DISCOVERY….done on a larger scale, it can also support another policy objective. If a bank comes to the Treasury and says “we are illiquid – help” the Treasury can now say “sell some assets”. The bank cannot any longer claim there is no market for those assets – they can sell them to the Geithner plan fund(s). When they are forced to sell them the difference between illiquidity and insolvency will become clear. If the assets sell near their book value then the bank really is just illiquid. If large haircuts are required the bank is insolvent. The government response can be dictated by a market price.

Market Movers, Felix Salmon:
I’m not convinced that the Geithner plan will be particularly great when it comes to price discovery, because correlation is at 1 right now, meaning that differences between good and bad assets get elided, and also because the plan is structured so that you can make a profit even when you overpay. I’m also not convinced that the biggest banks are as solvent as John [Hempton] thinks they are.. “Is there any reason to believe that there’s a private-sector bid out there for legacy assets at their current marks? Not really. But if there isn’t, the banks will simply refuse to sell, and there won’t be any money or assets changing hands at all. So color me highly disappointed in the whole thing.”

Information arbitrage, Roger Ehrenberg:
You can say something about the current administration – they are really trying. Details [of the PPIP plan] show both a lot of thought and some really good ideas. Unfortunately, the essence of the Program and its messaging are still missing the boat on a few important fronts. The main issue: the Government perceives the problem to be one of investor liquidity and the ability to finance broken asset portfolios. The problem is that they are wrong. It is all about banks not wanting to own up to inflated balance sheet values. But here are some other problems with the Program and its positioning...

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