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).