Legal Commentary

Geithner Plan D.O.A.

By Big Tent Democrat

Via Kevin Drum, ding dong the Geithner Plan is dead:

The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets. . . . Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses.

The entire plan was ridiculous. Now the question is what does it mean and do we need to do something different? More . . .

Is everything fine now?

“Banks have been able to raise capital without having to sell bad assets through the L.L.P., which reflects renewed investor confidence in our banking system,” said Sheila C. Bair, chairwoman of the F.D.I.C.

But some analysts said the banks’ reluctance to clean up their balance sheets meant they were merely postponing their day of reckoning. Indeed, some analysts said government policies had made it easier for banks to gloss over their bad loans. “What’s happened is that the government’s programs have addressed the symptoms of the financial crisis, but not the cause,” said Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods, which analyzes the industry. “The patient feels better, but the underlying cause of the problem is still unaddressed.”

If you read me previously, you know what I think - this is all a sham. We have many insolvent banks and we are pretending they are not insolvent.

Drum comments:

Maybe this will work out in the end. But history suggests that we'd all be better off if banks were forced to honestly account for their losses, take their lumps, and then move on. Instead, Geithner's stress tests have persuaded everyone that things are fine and losses on these securities aren't as bad as everyone thinks. Maybe so. But if Geithner and the banks are wrong, doing it this way is likely to drag the pain out over years, producing a long period of sluggish semi-recovery and slow, fragile growth.

That's basically my fear at this point. I sure hope Geithner knows what he's doing.

I imagine Geithner knows what he is doing - hoping that an economic rebound will save the banks. Can we have an economic rebound with a bunch a insolvent megabanks? As Roland Hedley says, time will tell. I suspect it will not work.

Speaking for me only

Full post as published by TalkLeft on June 05, 2009 (boomark / email).