[Diarist's Note: This diary isn't about the merits of nationalizing the banks, attaching strings to further Federal bank backstops, whether the money should be given directly to the people, whether the banks should just be allowed to fail, whether Geithner is really a Wall Street lackey, or any similar issues. It's just about the press's reaction to today's Treasury and Fed announcements.]
Stocks Slide as New Bailout Disappoints blares the current headline atop the New York Times online edition. I mean, forget the stimulus package passing the Senate, here is irrefutable evidence that the Treasury's bank bailout plan has already failed: the Dow dropped almost 5% today. The market has spoken! Head for the hills! What more evidence could people possibly want?
Actually, I think the drop meant something a little different.
Virtually all observers agreed that there was an enormous amount of pent-up anticipation about what Geithner was going to say today, and yesterday's delay of his remarks by another day, while necessary, only added to the tension. The reality is, this is an extraordinarily complicated situation to deal with, and while Geithner seems generally to know what he wants to do, he hasn't worked out all the details yet. In retrospect, it might have made sense to lower political expectations a bit ahead of the speech. But some important policy decisions do appear to have been made already.
As Paul Krugman, quoted in the Wall Street Journal, noted:
The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets.
The problem, another economist noted in the same article, is that
There simply is no fair way to take bad assets off the books of financial institutions. The sooner policy makers not just recognize it, but embrace it in their strategy, the better… By now, the only viable solution left may be to nationalize the financial institutions that are deemed to big to fail; it’s then a political decision whether depositors should carry part of the cost.
And according to Douglas Elliott at the Brookings Institution:
The bad bank, which will be fleshed out over the next several weeks, will be extremely tricky to design effectively. At best, it will be modestly inferior to the solution of providing a guaranteed floor value for toxic assets without requiring banks to sell them to gain the protection. At worst, the plan may fizzle by failing to achieve a large volume of purchases or may prove considerably more expensive for taxpayers than anticipated.
I may regret this in the morning, but while I think the banking situation is extremely urgent right now, I don't think this is quite the September day when the financial system purportedly almost collapsed that is featured in today's leading rec'd diary. I remember that week. I was at work fielding client calls about a Lehman bankruptcy (I am a business bankruptcy lawyer) when I began getting calls about exposure to Morgan Stanley and Goldman. Things are extremely bad now, but this doesn't seem like then. I think Geithner has a little more time to settle on the details.
What Wall Street wanted to hear today was that there was going to be some kind of definite government backstop for all the toxic assets that would assure large financial institutions that, however ugly their portfolios, there was a definite level at which the government would buy the assets itself. What they heard instead I think is that there's going to be a lot more pain liquidating these investments, and no magic pill to make all the upcoming pain to go away. Considering that we don't even know what the assets are comprised of at this point, the fact that we (the taxpayers) haven't committed (through the Treasury) to buy them yet doesn't really sound like such bad news after all--at least for all of us. The existing shareholders perhaps, not so much.
If you think the conference committee on the stimulus package is going to be a tough negotiation, imagine how many hundreds of billions of dollars are going to be impacted by the terms Geithner negotiates on the bad bank public-private partnership he spoke about. The goal isn't necessarily just to make Wall Street happy, it's to preserve a functioning financial system, and while there are overlaps between these two, they're not identical. Making the financial press and Wall Street wait a few more weeks until Geithner (at least tries to) come closer to getting it right doesn't seem to me like a horrible price to pay.