Don't Knock the Messenger: Bailout Has Good Points

[question everything]

FEBRUARY 18, 2009

Don't Knock the Messenger: Bailout Has Good Points
By JAMES B. STEWART
WSJ

Hasn't the Geithner bashing gotten a little out of hand?

True, last week's unveiling of the Obama administration's financial rescue did little to clarify the two big issues, which are how to handle the toxic assets on bank balance sheets and how to ease foreclosures and prop up real-estate prices. Not just conservative Republicans and pundits, but a wide swath of economists and even prominent Democrats piled on, seemingly eager to eviscerate someone whose tax problems and role in the previous administration's crisis management marked him as an easy target. However satisfying as theater, Geithner bashing will do nothing to ease the crisis. I've noticed a conspicuous lack of alternative solutions being offered by Timothy Geithner's critics. And the more I've studied Mr. Geithner's remarks and Treasury's accompanying disclosures, the more unfair much of the criticism seems.

Surely by now it should be clear that with respect to the big issues, there are no easy answers, no "silver bullet." To hold Mr. Geithner responsible for failing to supply it is unreasonable. Working with former Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, Mr. Geithner has been wrestling with these issues for many months. The Treasury "Fact Sheet" which accompanied Mr. Geithner's remarks contained far more detail than his critics have acknowledged and is in fact quite comprehensive. Recognizing that a one-size-fits-all approach hasn't worked, the plan will pose a stress test to separate the healthy from weak and failing financial institutions. The test goes beyond what is used by the FDIC for banks, and will test the ability to lend in "a more severe decline in the economy than projected." This should produce a list of weak institutions that can be fortified before the next crisis.

Troubled institutions will have access to a "capital buffer" provided by the Treasury in return for convertible preferred shares that "they can convert into common equity if needed." This is a departure from the previous approach, which stopped short of taking equity stakes in institutions receiving taxpayer money. It sets the stage for government ownership of some institutions -- the "N" word that everyone seems determined to avoid using. But this doesn't mean wholesale nationalization of the banking industry. It recognizes that some institutions are so weak that the only effective measure is to wipe out their shareholders, replace management, liquidate them or recapitalize them and return them with healthy balance sheets to private ownership.

There's no easy way to get troubled assets off the books of institutions that own them, but the public-private investment fund deserves a try. The goal is to use public money "to leverage private capital," thereby boosting the impact of any taxpayer dollars while significantly increasing liquidity. If the market is functioning (which it hasn't been), even the worst of these assets will have a price. Institutions can sell if they wish, and if not, they can face the consequences of further write-downs and the option of the capital buffer. Admittedly, Mr. Geithner has been vague about how this will work.

(snip)


James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.

http://online.wsj.com/article/SB123492172493705353.html (subscription)

[leftofthedial]

1. capitalism doesn't work anymore.

the world has run out of "free" resources to exploit.

The sooner these morons recognize this and move on to a system that shares scarce resources equally, the better.