In an op-ed piece on the WSJ today, Treasury Secretary Tim Geithner outlines the plan he has for financial institutions’ toxic assets. Last month, the highly anticipated plan for the financial system was met with disappointment as the newly appointed Treasury Secretary failed to avoid generalities. The lack of details on the plan of the secretary saw the the markets drop significantly. Since then, he has been under intense scrutiny from Wall Street for his seemingly inability to hand out a plan to fix the financial system. Today, they get their answer. But whether they will be cheering or booing is still to be seen when the markets open.
The public-private partnership (called Public-Private Investment Program) that was mentioned in Geithner’s plan last month will now be seen in action as the administration sets up fund that will create a market for the toxic assets that have caused immense trouble for the banks. Beginning at $500 billion, this fund can extend to as much a trillion in the future; the amount of the assets burdening the banks are estimated to be in the amount of $2 trillion.
The plan has three key features. First, private investors will have access to capital to be provided by the Treasury as well as loans from the FDIC and the Federal Reserve. The Program also aims to ensure that the risk will be shared with the private entities that will be participating. The secretary hopes huge participation from all types of investors. Finally, private investors will be the one to set the prices for the assets to be purchased in oder to limit the amount of money provided by the government.
Geithner writes that government involvement in this should be in such a way that it doesn’t compromise or effect in any way the participation of the private sector. Going back to the bill that was passed last week and aims to tax bonuses at a rate of 90% , the secretary seems to be warning Congress of proceeding with caution. He also believes that apart from government participation, solution cannot be reached if the private sector were not to take risks.
Read the whole of Geithner’s piece HERE.
This might not be exactly the answer to the biggest question that has been lingering in everyone’s mind, how do we price these assets, but I believe it does bring us a step closer to it. As of this writing, US markets are shaping up to be positive so this could mean that what lies ahead is the approval that Geithner has been waiting for. While the private sector is expected to compete for the prices of the assets, there are a few things that should be noted. For now, I believe there will not be the level of participation the secretary expect. Rather only a few private entities might be willing to participate in the program. Without the knowledge about the real value of the assets, only few could acquire these assets – the big asset managers who have a better understanding of their real worth particularly once the markets start to pick up. The pricing problem remains unsolved but this could at the least help elevate the value of these assets once demand starts (from the big managers) start pouring in.
There also remains the question of the role the Congress will play once this program kicks off. Last week’s action of passing a bill on a whim spook a lot of the investors, leaving them wondering about what other kind of garbage legislation could come out of Washington. In matters like this, only four parties need to be involved: the Treasury, the Fed, the FDIC, and the private sector. With an additional $500bn-$1 trillion of spending, Geithner & Co. might find themselves scrutinized once again particularly by Republicans particularly after the $1.5 trillion addition to the Fed’s balance sheet after it unveiled just last week plans to buy government debt as well as provide funding for the purchase of MBS/ABS.
For now, Geithner could be giving himself some breathing space or it could serve as his permanent life support. Well, it still depends on how well he delivers specifics today.