Trader Talk

Mr. Geithner Bombs In His Debut


Treasury Secretary Geithner gave his long-awaited speech, speaking of the need to fund new buying of asset-backed securities, of helping private equity purchase old assets through a public/private investment fund, of foreclosure mitigation, and a new capital infusion into banks that pass a "stress test."

Wall Street gave it a thumbs down.

The lack of specifics from Treasury Secretary Tim Geithner rattled the Street (particularly on the public/private venture, where there was no word on how assets would be priced), and the talk of a "stress test" caused a notable selloff in banks, with many big names down 20 percent or more.

Why would a "stress test" rattle banks?

First, it implies that those that pass will be eligible for new equity injections, and those that don't in trouble.

Second, this has revived fears of heavy dilution, more regulation, and effective nationalization for those that are left.

Has the market over-reacted to the Geithner speech?

There were several positives in his speech. For example, his support of the public/private investment fund indicated he wanted to reduce the government's role in the markets, which is not irrational. Providing credit enhancements as a carrot for private equity to purchase assets makes sense.

Still, judging by the chilly reception Geithner received in his Congressional testimony, it does not look like there is a lot of support for additional funds for the Financial Stability Plan, at least not in the short term.



Questions?  Comments?