Tuesday, February 10, 2009

In Defense of Geithner

I always thought that Tim Geithner was the wrong guy to reform our financial system. Nothing personal, but I think it is hard for a guy with his resume to, all of a sudden turn against the system that made him who he is today.

Geithner has been part of our financial system for years. He worked at the Treasury Department early in his career, at the IMF, and more recently he was the president of the NY Fed. He worked under Rubin and Summers and was involved or close to every bailout in recent years. As part of the Fed since 2003, he was part of the Greenspan/Bernanke-Bubble machine all the way to the Bear Stearns-Lehman-AIG/now-we-do-now-we-don't policy fiasco. Not the guy I would pick for fresh out-of-the-box ideas.

Even since before he was nominated, the markets have been building up to the day when, with the magic touch of our president-wonder, he would unveil "the plan" to restore financial stability to our country. Today, he had his day under the lights, and, according to our god THE DOW, he failed. Tim Geithner, he of the many bailouts, failed to convince his former friends in Wall Street that his plan will restore our banks to health.

The problem is that NOBODY can do that. The way I see it, the financial establishment has yet to accept the fact that many of the assets clogging the banks balance sheets have been permanently lost. In other words, is not just a matter of waiting X amount of years for the securities to regain their value as the enemies of mark-to-market (which shockingly enough counts many analysts) would lead you to believe. The money is gone and it will not come back in time.

The majority of people in Wall Street are under the illusion that the whole thing can be fixed with leadership from the Obama administration. Leadership that Tim Geithner failed to exhibit today with the negative results for those counting on and Obama-rally to kick off 2009. Thus, the negative reaction by the markets and the pundits in the street. However, after carefully looking at the announcement, the real surprise is that Geithner, the Street insider, did not announce any kind of scheme that could have resulted in a purchase of bank assets at par value using taxpayer's money. This, combined with the "stress test" for the banks, leads me to believe that at least the government (if not the CNBC crow yet) is getting ready to face reality.

As many savy analysts know, the problem is not with valuing the assets, but with the reluctance to value the assets. Many firms, like Morgan Stanley and Goldman Saches, have already aggresively written down their toxic securities. Merrill Lynch had no trouble selling a portfolio of structured securities a the right price (24 cents on the dollar). Many hedge funds own and trade these securities on a daily basis. The real problem is that, at fair prices, many banks have negative equity and that is why they don't want to find the price in the hope that the government will overpay for the assets under the 2-big-2-fail theory. Geithner moved a few steps away from that possibility today and I think that is good.

According to the announcement, the government will help establish a secondary market for these assets. This means we will have a bid. With that information, the regulators will be able to perform stress tests and decide which institutions are not viable. The anwsers, no doubt, will not be pretty, but it is better than not knowing.

Acceptance is the first step to recovery (or something like that).

Monday, February 2, 2009

Who does Geithner work for?

As someone who has a profound distaste for BS, I nevertheless have to admit that I admire American Bankers. For instance, take the fracas over their 2008 bonuses. While most mortals cannot believe that these guys got paid a ridiculous amount of money while racking up the largest losses in History, they actually want the rest of the World to feel sorry for them!

You see, in "the street", what counts is how much you are up or down since last year. Thus, if you made $10 million in 2007 and $5.6 million in 2008, you are actually suffering a pay cut. Furthermore, in order to compensate for this pain and to make sure that you do not take one of the many offers you may have for $10 million (remember that every bank has government money now) your manager may give you a sizable award of stock and options. Indeed, the $18 billion that caused so much distress are for bonuses paid in cash in NY and does not include any deferred compensation not taxable in 2008. In any case, since many analysts ignore the cost of options, the whole thing is essentially free.

The real reason I admire bankers is that they have managed to convince everyone that they actually have special talents who deserve to make this kind of money. It seems to me that it is far harder to perform surgery than to give a PowerPoint presentation that shows that you need to increase your company's leverage and use the money to buy your competitor or your own stock, but who am I to judge. In any case, the bankers have convinced everyone that they make a lot of money because they are smart and that the proof that they are smart is that, you guessed it, they make a lot money. Never mind that the banks, as we now know, did not really made that money since it is now all being written off.

The politicians in DC, who are not that smart to begin with, are hopelessly mismatched against these compensation geniuses. For instance, Tim Geithner, no doubt sensitized by the tough words from his boss against his old (sshhhh! its a secret) friends, is introducing tough language in his Bad Bank Plan in order to cap compensation at 60% of the World Record Year of 2007! Who is this guy kidding? Not only that, I dare Mr. Geithner to rein in the deferred compensation awards. By the time he catches on, he may already be out of Washington working for one of the large banks.

To add insult to taxpayer-injury Mr. Geithner, like his predecessor, insists on lax rules because otherwise the banks may choose not to participate. It seems to me that if they do not need the money badly enough, we could always use it for something else, but what do I understand about the world of high finance?

In any case, there is enough evidence to believe that Mr. Geithner's Bad Bank Plan will be designed to pay the maximum politically possible price for the assets these very smart people bought for the banks which in turn created the earnings that resulted in their record 2005, 2006, and 2007 bonuses. In addition, he will offer taxpayer subsidized insurance for the other assets they still have marked at par (which is another way of paying close to par) while protecting the sacrosant common equity holder. Why? because the bankers have convinced Mr. Geithner that if current sharholders lose nobody will want to buy bank stocks ever again. He either believes this or doesn't want to fight with his old and, perhaps future, friends.

Fight for the taxpayer? What a quaint idea.