Did I miss something? Slap a shiny new name on all those loans nobody wants ( I would call it sh*t) but the marketing folks have something even better- Legacy loan.) You and I know that renaming doesn't really change the true nature of what something really is. But the new moniker of Legacy loan sounds soo...lasting? Treasury Secretary Timothy Geithner’s plan to remove banks’ distressed assets cleared its first hurdle yesterday as markets rallied. Geithner thinks that private investors will partner with the government to unclog the balance sheets of banks. Think of it as a kind of Metamucil for the banking system..Although taking into account how the markets reacted yesterday, enema might be a better description.
All key stock indices gained around 7%, with the Dow Jones index jumping nearly 500 points to close at 7,775 - its highest level in more than a month.
Where's that magic wand when the FDIC needs it? It must feel like a daunting task (think Citi group.) The government is just a little too close to Wall Street for my taste. Free $ from the taxpayer, no quid pro quo.Bank stocks were the biggest winners yesterday with Bank of America up 26%, JP Morgan Chase jumping 25% and Citigroup ending the day with a 19.5% gain. Biggest' of big winner was Nasdaq-listed Frontier Financial Corporation, a regional bank serving the Northwest of the United States, which posted a gain of 52% - Always attractive to Wallstreet to obtain a non recourse loan, investors walk away. Cash for trash- really.
The benefits from nationalization come from (a) giving taxpayers a share of the upside rather than just a share of the downside, which is where we are now (b) ending the gaming of the system, even looting, that is encouraged by the current system of implicit guarantees (Simon Johnson has been very good on that) (c) making it politically and fiscally feasible to put in enough capital to revitalize the system. These advantages are there whatever you decide to do with junior bank debt.
That said, some decision must be reached on bank liabilities. Sweden guaranteed all of them. If forced to say, I would go the Swedish route; but of course we can’t do that unless we’re prepared to put all troubled banks in receivership. And I’m ready to be persuaded that some debts should not be honored — this is a deeply technical question.
Can't Geithner take note? AIG should have undermined the Geithner task at hand. House financial services will hear Geithner Thursday....should be interesting. Will they flush Geithner? Could he be in over his head? Is President Obama squandering his credibility, backing this plan and praising his Treasury Secretary..
It's gonna be a very dangerous year. ouch.