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Wednesday, February 11, 2009

Ignore the Equity Markets: New Treasury Sec On Track

Wall Streeters and the incredibly biased financial media all piled on today. Ignore this, for the most part.

First, it is important the the Treasury has now made some decisions. This reduces uncertainty.

Now, they need to execute.

Geithner ought to sit with people who are skilled at helping him to sell the plan to ordinary Americans, to render it less complex (including some media skills people, to soften his ... visage/image). He needs a media schedule (and well-disciplined lips at the same time - it's a really though job).

What do they need the most? Geithner is right on, here:

The success of our financial stability plan is going to require an unprecedented level of cooperation, here in the United States and around the world.

Now that they've got a plan, they can start to rally support for it, including no longer apologizing for putting taxpayer money at risk, for the obvious public good.

What are they going to do?

Well, they are going to squeeze the big banks, using a more rigorous and forward-looking stress test, and provide two ways for banks to clean-up their balance sheets. (Small banks won't be squeezed the same way, but they can get help if they submit to the squeeze test).

This is partly why bank stocks sold off. The push is going to be for shareholders/companies to recognize losses sooner, rather than later. Make no mistake, that is GOOD NEWS for the economy long-term, if it can be done thoroughly and comprehensively. Bank stocks, of course, may not be the best barometer that. It is much better than the other choices on the table, like let's pretend accounting... In my best guesstimate, we haven't bought enough time, even with $850 billion, for "let's pretend", especially if the large banks continue to make losses.

What else?


They are going to try to do public-private capital, before something like outright socialization. Perhaps more than anything, this is what will require the "unprecedented cooperation".

There are state pension funds and others that might be "lighthouse" partners. The Republican-controlled money may well balk, but shopping bad-loan portfolios will add transparency and is good in so many ways. Lehman was reportedly trying to do this with its commercial real-estate loans, so it's not like Wall Street doesn't itself think that's a way to go. If the government can grease the skids for these deals, that's a good thing.

Private investors are always looking for better returns than the next guy, not generic investment "pools"; but there may be a way for that to occur in a bidding process for assets or if firms take up "management fees" for participating and leverage their own client base.

What's missing?

Early on, two things stand out.

They don't have the housing piece, yet. Why does everyone continues to put this last in the queue, except that it is the politically most difficult? It's fire-ready-aim, in the worst way.

Geithner hasn't impressed me that he understands the timelines, that he's in a really, really, really, really, really high-stakes race, with his plans and so forth. To be fair, it looks like Paulson & Co. didn't leave him with anything on housing to work with, plans OR analysis.

At the very top, still, at the Obama-Biden level, it's not clear that they understand that they need new organizational structure. "Advisory council", especially of the kind they just appointed, is ... well, would you appoint a "war council", or would you go for a far-reaching command-and-control structure, that could marshall huge amounts of information and execute a wide-range of policy initiatives? I know they have only been in office for 20 days...