TARP 2.0 - Geithner rocks!

In keeping with Wall Street's fickle ways, Timothy Geithner's second attempt at pitching his bank bailout scheme seems to have catapulted him from political pariah to rock-star. At least that's what the market seemed to be telling us yesterday. Let's hope it sticks.

I'm not sure if the so-called Public-Private Investment Program is the best solution, but I am hopefulit will get us where we need to go. The critical question is whether or not private capital will find the terms of the program appealing.

Here's a quick summary:

  • The intent of the program is to get private money to participate in buying troubled assets from banks.
  • A bank will select the assets it wants to sell; the FDIC will decide whether the assets qualify to be part of the program.
  • If an asset qualifies, private investors will evaluate it and submit a bid.
  • If the asset in question is a whole loan, the private investors will put up 1/14 of the money to buy it, the U.S. Treasury will put up 1/14 of the money, and the rest of the money will be provided by government guaranteed borrowing.
  • If the asset in question is a mortgage-backed security, the investor will put up 1/3 of the cash, the U.S. Treasury will put up 1/3 of the cash, and the Treasury would also make a loan to the fund of 1/3 of the value of the deal. Under certain circumstances, the Treasury's loan to equal up to half of the deal's value.

Potential problems?

I see two potential problems:

  • As with every solution coming from Washington, this plan assumes that we can borrow all the money we want. How much money can we borrow before the debt markets start to get indigestion? Let's get serious folks, isn't it time for our political and financial leaders to wake up that this one-trick pony is about dead.
  • The FDIC will take a very big role in the whole loan area. Not only will the FDIC will guarantee the debt for the whole loan deals, but is will also regulate the Public-Private Investment Funds that purchase the whole loans. Do you really think private capital wants to be regulated by the FDIC? 

What this means for you:

If the program works like everyone hopes, this should be the beginning of the end of the banking crisis. The removal of troubled assets off bank balance sheets will allow them to move forward with greater confidence: Bank management will no longer have to worry about criticism from regulators or auditors; shareholders will no longer have to worry about equity evaporating with the stroke of the auditor's pen; depositors will no longer have to worry about banks spontaneously imploding.

The net result is that banks should be able to begin banking again. That will be good for everyone and will eventually lead the economy out of the recession.