Five Reasons the Markets Don't Like the Bank Bailout
Wall Street's message to the Obama administration was clear Tuesday, even if the plan to save the banking industry wasn't.
From the squishy rhetoric about how complex the problem is to the lack of a clear time-frame for when specific weaknesses in the financial sector would be addressed, Geithner's speech did nothing to assuage the market's concerns about the nation's future.
Broadly speaking, reaction to the speech broke down into five areas:
1. There Really is No 'Change'
"I'm really underwhelmed by the plan," says David Twibell, president of wealth management for Colorado Capital Bank in Denver. "Maybe there's not much that can be done right now other than let this work itself out."
For someone who ran last year as an agent of change, President Obama's plan for banks seemed to represent more of the same. While investors were looking for some concrete moves on how distressed assets would be taken off banks' books, they instead walked away from Geithner's speech with no indication of how the assets would be priced or who would be buying them.
And as one of Wall Street's oldest maxims goes, the market hates uncertainty.
"I think we need to see exactly how this program is going to work," Twibell says. "Maybe that will give the markets a little more comfort level."
But for many, the plan offered little real guidance for how to invest going forward, save for a promise to help buoy small business.
"Zero has changed," said Michael Cohn, chief market strategist at Atlantis Asset Management in New York. "Everyone knew everything except the issue with doing something positive for small business. There's no clarity on whether they can repeal the mark-to-market (accounting rules). I don't know how they're going to do it."
2. A Far Cry From Finished
If the administration was purposely setting out a general plan with the specifics to be crafted by Wall Street, then it may have accomplished something.
With so many details left unsolved, much more work will have to be done, again creating uncertainty for investors.
"It's going to be fine-tuned many times over," predicts Quincy Krosby, chief market strategist at The Hartford. "Given the enormity of the problem it's clear that certain parts will work and certain parts won't work, but it's a start."
The market is clamoring to know how the government will be able to help banks with their toxic assets while also protecting investors and taxpayers from getting blindsided if the fixes don't work.
"The devil's going to be in the details with this stuff," Twibell says. "We're still back to the old problem of how you price that, how you structure that."
3. Treasury Bubble Still Popping
While Treasurys rallied Tuesday on a further flight to safety, government debt prices are likely to fall as more and more supply comes on line while the government finances the bank rescue.
- Analyst: One Regional Bank Will Survive
- Stimulus May Be 'Beginning of the End': Pros
- Value Stocks: Get 'Em While They're Not Hot
The predicted trend reflects the difficulty the government will face getting a premium on bills it will be in a hurry to unload.
"The idea that you can just borrow and spend, borrow and spend, run ever-larger deficits and essentially print money with no consequences is economically naive," says Mike Larson, analyst for Weiss Research's Money & Markets newsletter. "Yet no one seems to be talking about the unintended consequences until now."'
Larson called the popping of the bond bubble months ago and sees the trend continuing as the government accumulates more and more debt.
Moreover, he said the pressure on Treasurys will cause interest rates to rise and thwart hopes of mortgage rates falling to 4.5 percent or even lower, a prediction made Mondayby Bill Gross, co-CEO of Pimco, the world's largest bond fund.
"The longer-term trend is clearly for lower prices and higher rates as a result of this supply issue," Larson says.