http://www.washingtonpost.com/wp-dyn/content/article/2009/02/10/AR2009021003917.html
Geithner Plan Lacks Freshness And Clarity
Paulson's Criticized Path Is Followed
By Neil Irwin
Washington Post Staff Writer
Wednesday, February 11, 2009; D01
In rolling out his overhaul of the financial rescue yesterday, Treasury
Secretary Timothy F. Geithner lambasted the Bush administration's
response to the crisis over the past year.
"Policy was always behind the curve, always chasing the escalating
crisis," Geithner said, criticizing his predecessor, Henry M. Paulson
Jr. "The emergency actions meant to provide confidence and reassurance
too often added to public anxiety and to investor uncertainty."
But yesterday, Geithner seemed to be following the Hank Paulson
playbook, according to a wide consensus on Wall Street, in Washington,
and beyond.
Many of the specific policies Geithner offered were tweaks, adjustments
or continuations of Paulson's strategy. And the more novel elements of
the Geithner plan -- the creation of an entity with public and private
money to buy up bad assets from banks, a "stress test" of 20 or so of
the nation's largest banks, and $50 billion to prevent foreclosures --
came with so few details about how they would work that it contributed
to the very public anxiety and investor uncertainty that Geithner
criticized.
"The markets are looking for real clarity," said Desmond Lachman, a
resident fellow at the American Enterprise Institute, "and Geithner is
very good at critiquing what went wrong in the last year, but just seems
to be perpetuating it."
Some elements of the Geithner plan -- the ones that were unveiled with
the most detail -- are direct continuations of rescue efforts undertaken
by Paulson.
The Treasury and Federal Reserve, for example, announced in November
$200 billion to jump-start lending for a wide range of consumer loans.
Geithner played a major role in designing that program in his former job
as president of the New York Fed, as did Steven Shafran, a Paulson aide
whom Geithner has retained at Treasury. That program is being enlarged
to as much as $1 trillion, and will be expanded to support commercial
real estate and residential mortgage lending.
That expansion came as no surprise to Treasury-watchers, however. In
announcing the original program, Paulson said in a speech, "The facility
may be expanded over time and eligible asset classes may be expanded
later to include other assets, such as commercial mortgage-backed
securities, non-agency residential mortgage-backed securities or other
asset classes."
The newer components of Geithner's bailout program have yet to be
fleshed out.
Among them is the creation of a public-private fund to buy up distressed
assets on the balance sheets of banks so they have the freedom to resume
lending, which in turn can help stimulate the wider economy.
Geithner intends to solve the nettlesome question of how to price them
by having private investors put up capital and decide what to buy and
for how much. But Treasury officials deflected most questions on how the
new fund would be structured, saying that they were laying out only a
broad framework and that much work is left to be done.
Geithner also pledged that bank regulators would begin conducting stress
tests of banks with more than $100 billion in assets to figure out what
would happen to their financial positions if the economy keeps
deteriorating rapidly. The results of that review would determine which
banks would be pushed to raise new capital from the private markets, or,
if they are unable, from the government.
But if it's the latter, on what terms?
Geithner and his staff have given few specifics. And investors have been
reluctant to invest private money in banks, in part because of
uncertainty about whether the government will wipe them out in the future.
"He says we need to stress-test the banks, but they're already in the
middle of the biggest stress test in decades," said Brian Bethune, chief
U.S. financial economist at Global Insight. "The question is: Are they
able to survive the current cycle, and if they need government help,
what will the conditions be?"
One of the main criticisms of Paulson's bailout effort was that it was
difficult for the public to discern how the funds were being spent.
Geithner pledged to make the financial rescue more transparent,
establishing a Web site, http://FinancialStability.gov, which will
publish detailed information about what banks are doing with the
government investments they have received.
That added transparency does not necessarily mean that banks will ramp
up lending. "There's a lot of talk and poetic rhetoric about there being
transparency and strings attached, but I'm not sure the banking system
even knows how to lend in the way we need it to now," said Lynn Tilton,
chief executive of Patriarch Partners, a private-equity firm.
The proper way to measure success, Geithner said, is by looking at how
much banks are lending relative to how much they would have lent had
they not received the money.
"One problem you run into is that money is fungible," said James Angel,
a finance professor at Georgetown University. "Dollars can be
substituted left, right and sideways. If you say we gave you a dollar,
did you use that for a new loan? It's impossible to trace. You can come
up with all the new reports you want, it doesn't change that reality."
Another common complaint from lawmakers about the previous bailout was
the absence of aid for distressed homeowners. Geithner pledged to deploy
$50 billion from the Troubled Assets Relief Program to help prevent
mortgage foreclosures, part of an overall plan to support housing that
the Obama administration plans to announce in the "next few weeks."
On Dec. 1, Paulson said "we are continuing to examine potential
foreclosure mitigation ideas that may be an appropriate and effective
use of TARP resources." More than two months later, Geithner yesterday
offered a more solid commitment to execute such a plan. But he still
offered no more specifics on how it would work.
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