Geithner's vague debut

Markets slumped when Treasury Secretary Timothy Geithner unveiled his rescue plan and for good reason too. The fundamental problem is that there just isn't enough detail. The plan is to to purchase toxic mortgage assets through some sort of vague public-partnership, but no-one yet knows exactly how that will work. Nor do we know whether banks lumbered with toxic debts will be allowed, or forced, to fail. And don't ask how those illiquid assets will be removed from balance sheets. For that matter, we don't know what will be done to arrest the decline in US property prices.

Geithner said there would be tests to determine which banks needed more capital from the US government. What's not clear is whether the government will shut down banks that the tests reveal are close to insolvency, or whether it will put more money into them. As the New York Times reports, Geithner made it clear that he did not want to get bogged down in giving too much away because he wanted to get the details right. For that, read that he doesn't want to be pinned down. Geithner has gone from being Indispensable Man to Indecipherable Man, writes commentator James Pethokoukis.

"Where was Geithner the Technocrat when you needed him? Because that is just what the markets need right now: a detailed, technocratic explanation of the way forward. This might have been the clincher as far as investors are concerned."

As Australian business commentator Alan Kohler says, part of the problem is that a lot of the money will go into collateralised debt obligations and nobody knows exactly how much they are worth. The mathematical value of synthetic CDOs might be anywhere from 30 cents in the dollar to 100 cents but the market value, given that the market is dead, is about 1c to 2c in the dollar. "In other words, we are talking about hundreds of billions in assets that have essentially no value at all, but have not yet been written down by the banks."

The bottom line is this: the Obama administration seems to be in the same sort of denial as its predecessors. It's not providing any detail on the price for bad assets and how much capital needs to be injected into banks to get them lending again. Instead, the administration is giving the world the impression that it's floundering around for a solution. Eventually, it might actually start dealing with the problem. But not before time. As Winston Chuchill famously said, you can always count on Americans to do the right thing – after they've tried everything else.


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