- Busch: US Health Care Bill a Concern for the Chinese
- Farrell: The Market is Still Seeking Reassurance
- Schork Oil Outlook: Still Bearish Crude, But Skeptical
- Taking a Page from Obama's Asia Agenda in Investing
- Hirschhorn: Risk-Averse Traders
- Roginsky: A Funny Thing Happened on the Way to Financial Reform
- Downturn is Prime Time for Airport Infrastructure Projects
- Busch: Pressure Builds and Expands For Chinese Trade War
- Tamminen: Carbon Insurance For Your Car May Be Down The Road
- Busch: Another Obama Opportunity
MOST SHARED
- BlackRock: Central Banks To Be Net Buyers of Gold
- Millions May Have to Repay Part of Obama Tax Credit
- Weak US Housing Market Drags on Lowe's Profit
- Gold Is in a 'Bubble' And Will Keep Going Higher: Gartman
- Devon to Sell its Gulf, International Assets
- Madoff Auction: $4,750 for a Decoy Duck?
- Cisco Ups Tandberg Bid, Claims Over 40% Backing
- Underwater Mortgages Could Sink Even Deeper
- South Korea's Samsung Life aiming for 2010 IPO
- What Were The Northwest Pilots Really Doing?
- S&P to Hit 1,175 in the Short Term: Strategist
- Your Jobless Recovery Game Plan
- S&P to Hit 1,175 in the Short Term: Strategist
- Busch: US Health Care Bill a Concern for the Chinese
- Underwater Mortgages Could Sink Even Deeper
- My Market and Fed Outlook Now: BlackRock's Doll
- Farrell: The Market is Still Seeking Reassurance
- GM Cuts Losses—Plans Early Loan Repayment
- What Recovery? Many Homeowners Still Underwater
- Gold Is in a 'Bubble' And Will Keep Going Higher: Gartman
- Madoff Auction: $4,750 for a Decoy Duck?
- Slideshow: Madoff's Luxury Boats Go Up for Auction
- Retail Sales Show Gain, But Manufacturing Gauge Slips
- Business Inventories Fall 0.4% in September
- Intel Plans to Increase Dividend 12.75%; Shares Gain
- Several Credit Card Companies See Default Rate Fall
- How Much Do You Know About Green?
RSS FEED
CNBC Guest Blog
Text Size 
"But patience is also needed because the turmoil will not end quickly and significant challenges remain ahead." With these words, US Treasury Secretary Hank Paulson succinctly described the current state of the credit crunch.
The US Treasury and the US Federal Reserve have programs that are either just started or have yet to start and that means any positive effects from their moves have yet to be translated into an easing of the credit logjam. A good example of this is AIG getting another draw of $37.8 billion without selling one asset from its troubled securities portfolio.
As most of you have read by now, the NYT reports that the US Treasury is now contemplating a program that would directly inject capital into banks that request it. "Treasury officials say the just-passed $700 billion bailout bill gives them the authority.... and that "such a move would quickly strengthen banks' balance sheets and, officials hope, persuade them to resume lending.
In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones." Curiously, the NYT says that the appeal of this plan is that it "would directly address the worries that banks have about lending to one another and to other customers."
However, this program has a huge signaling implication that the injection would only go to weak banks that are willing to be saddled with giving up ownership and limits on executive pay including recovery of any bonus pay that is based on stated earnings that turn out to be inaccurate. This is exactly the same problem that the TARP or EESA program is faced with getting banks to participate. The price for securities has to be set high enough to compensate banks for the negatives.
This is why I believe the US Treasury will err on the side of setting the price too high. Tsy needs to get companies to participate to help liquefy them and to remove the mortgage securities from the market. Also, Treasury needs to use the facility or Congress will ask them why Paulson/Bernanke came to them with their hair on fire to get a massive program that no one uses. Whether it's purchases of MBS or direct injections, this program will get utilities. The problem is when.
Like the 1930s, I think we'll continue to get a "kitchen sink" approach to the credit crisis until authorities get the gears of the capital markets to engage. Some of these programs will likely get struck down next year if they over-step the bounds of legal authority. For now, Bush/Paulson/Bernanke will do everything they can to arrest the descent. The problem remains when.
________________________
 |
Data is a real-time snapshot *Data is delayed at least 15 minutes