OK, That's Your Plan—Now Where's The Money?
The much-anticipated financial-rescue plan drew some positive reviews from business and Democrats in Congress, but failed to impress Wall Street.
Though some say the measures were a marked departure from the Bush administration’s efforts to prop up the financial system, critics say Treasury Secretary Timothy Geithner's financial plan doesn't offer a convincing strategy on how to deal with toxic assets and generally leaves funding questions unanswered.
“Its all generalities—it's more of the same,” said Lawrence White, a former White House economist and savings and loan regulator, now with NYU’s Stern School of Business "They don't seem to be able to go out with specifics. That’s what killed (former Treasury Secretary Henry) Paulson.”
"I think we need more information," Sen. Richard Shelby (R-Ala.) told Geithner during a Senate Banking Committee hearing on the plan on Tuesday. "We dealing with maybe trillions of dollars."
The plan did not, as many had hoped and expected, call for the creation of a free-standing entity—known as a "bad bank"—that would buy toxic assets from financial firms and then sell them back into the marketplace.
Instead, the plan calls for what some consider a murky, private-public partnership in the form of a fund to buy the assets, through some combination of capital and guarantee assistance.
Even opponents of the "bad bank" model were unimpressed.
“I am dubious about the cost to taxpayers of the vehicle that will facilitate sales of assets. “ said William Isaac, former FDIC Chairman. “It is a better approach than a bad bank, but depending on the amount and structure of government support, it could be extraordinarily expensive to taxpayers."
The plan calls for a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
By most estimates, there are $1.5 trillion to $2 trillion in assets that fall into the troubled category, either in that they illiquid or non-performing.
Two key financial industry trade groups, the Financial Services Roundtable and American Securitization Forum, issued statements saying that supported virtually all of the financial stability plan's measures.
The Geither plan assumes that there’s adequate private sector capital available. There’s some agreement about that in Washington and on Wall Street.
Rep. Jeb Hensarling (R-Texas), who was among those in Congress pushing for a private capital component in the original TARP legislation, called the current idea "feasible" because there's a lot of money "sitting on the sidelines,” but still favors the insurance-based model he proposed, wherein firms participating in the asset transactions pay fees.
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Carlye Group co-founder David Rubenstein, for one, recently told CNBC that “private equity does have capital.”
The fund, however, appears no more likely to solve the riddle of pricing, such that buyers don’t overpay and sellers don’t accept fire sale prices, even though the intent is to have private sector buyers essentially establish market prices rather than a government entity.
Rubenstein considers pricing the principal problem because “many people who own assets don't yet want to recognize that their value has gone down so much that when they sell they’re going to take a bigger write down than they would want to take.”
Rubenstein estimates it could take six to none months before sellers are willing to enter the market and accept a proper haircut.
What’s unclear, however, is how much government money such an approach will entail.
The Geithner plan doesn’t address that, nor does it indicate where the funding would come from. About $350 billion remains in the TARP, but given all the other measures in the plan, that might not leave much available, which would require another source of funding.
In a recent interview, Rep. Brad Sherman D-Calif.) shared his concerns about the government purchases or guarantees of bad asset purchase, saying if the Fed got involved "it would clearly give the government more money to work with.”
It’s no small matter because as Fed Chairman Ben Bernanke told a Congressional panel Tuesday, while the TARP authorized the Treasury to inject capital into banks, the Fed is only allowed to make loans under the Federal Reserve Act.
There were already questions about whether the administration plans to use a multiplier method in dealing with the troubled assets through the ring fence model rather than a virtual dollar-for-dollar approach. Those will probably also apply to new private-public fund model.
"There is an attempt as I sense of Treasury and the federal Reserve to find other conduits for funds to be used or guarantees to be put in place that really do represent commitments, that don't have to be passed by Congress or openly declared,” Rep. Paul Kanjorski (D. Pa.) told Bernanke during the hearing.
The Fed has been loaning billions of dollars under section 13.3 of the Act, which authorizes it to do so under “unusual and exigent circumstances.”
By Bernanke’s count, the Fed now has a $2 trillion balance sheet, 95 percent of is devoted to supporting the credit markets but is "extremely safe, overly-collateralized” and raising money for the government.
Under the Treasury’s plan, the current TALF program could be expanded by up to $1 trillion to support business and consumer lending in the secondary markets.
When asked by one Congressman if the Fed could extend its balance sheet to $5-10 trillion, Bernanke didn’t rule it out, but was quick to add it depended on the length of loans, especially if they were short-term, as in over-night loans.
Hensarling told CNBC.com there "appears to be little check" over the Fed using its balance sheet and that if concerns remain “Congress would have to explore statutory authority to limit (that)."
Sherman took a bolder approach, telling Bernanke: “I cannot think of the words that will really limit you in terms of the quality of the loans you make. If we're going to limit your power at all we could do so in terms off quantity."