Geithner: Will He Disappoint? Excerpts from Upcoming Speech

The focus in the financial markets this morning is on US Treasury Secretary Timothy Geithner. He is set to unveil the Obama Administration’s Financial Rescue Plan and the TARP portion of the plan is being rebranded as the Financial Stability Plan and the big question is “Will the rescue plan be enough to turn around the US economy or will the critics crush any optimism?”

Currencies are trading lower ahead of Geithner’s 11am ET speech because there is talk that a bad bank will not be apart of the plan. Excerpts from his upcoming speech have already been released and so far, there is nothing to get incredibly excited about. If Geithner is not completely confident about the Treasury’s plan, traders could plow right back into the US dollar on the fear that the US government is rolling the dice once again.

Expect a cocktail of initiatives that may include a bad bank that buys up the toxic debt or at least some sort of asset guarantee, more oversight, a plan on how to use the remainder of the TARP funds, expansion of the Term Asset Backed Securities Loan Facility to help private investors and direct assistance for homeowners facing foreclosure. One of the big questions will be how the toxic assets will be priced. If they are sold at market values, banks may have to report significant losses, which would erode their balance sheets even further.

Here is a reformatted version of excerpts from Geithner’s speech courtesy of Bloomberg News:

Wire: BLOOMBERG News (BN) Date: 2009-02-10 13:44:56
Geithner’s Feb. 10 Speech on Financial Recovery (Text Excerpts)

Feb. 10 (Bloomberg) — The following is a reformatted
version of excerpts of prepared remarks for Treasury Secretary
Timothy Geithner’s speech on the financial-recovery program
today. Geithner is scheduled to speak at 11 a.m. in Washington.

As President Obama said in his inaugural address, our
economic strength is derived from “the doers, the makers of
The innovators who create and expand enterprises.
The workers who provide life to companies and, with their
earnings, support families and invest in their future… This is
what drives economic growth.
The financial system is central to this process,
transforming the earnings and savings of American workers into
the loans that finance a first home, a new car or a college
education, the credit necessary to build a company around a new
Without credit, economies cannot grow, and right now,
critical parts of our financial system are damaged.

Instead of catalyzing recovery, the financial system is
working against recovery, and that’s the dangerous dynamic we
need to change.
It is essential for every American to understand that the
battle for economic recovery must be fought on two fronts. We
have to both jumpstart job creation and private investment, and
we must get credit flowing again to businesses and families.
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Currencies Soar as Fed Announces More Stimulus, GDP Not as Bad as Feared

US GDP growth has contracted but that has not stopped the equity and currency market from rallying. The GDP number was not as bad as the market had feared but what really drove the markets higher was the Federal Reserve’s new Term Asset-Backed Securities Loan Facility (TALF).

Both the outgoing and incoming Presidents are stepping on the gas and that is helping to restore investor confidence. President Elect Barack Obama has formed his Economic Team and is outlining his Economic Stimulus plan. The Bush Administration, bailed out Citigroup yesterday and has now made a colossal announcement aimed at putting a bottom in the asset market.

Their 35% increase in the Fed balance sheet represents another $800B worth of stimulus and will cause the Fed’s balance sheet to balloon to $3 trillion. For investors that have been concerned about the funding crisis, this is an even bigger reason to sell dollars.

Here is what the Fed announced minutes before the GDP number:

– New $200B facility to support ABS
– Buy up to $500B in mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae
– Buy up to $100B in direct obligations of housing related Government Sponsored Enterprises
– The Treasury will use $20B of TARP funds to provide credit protection to the Fed

Expect GDP Growth to Worsen

The 0.5% drop in GDP is mild when compared to past recessions and raises the risk of a sharp decline in fourth quarter GDP. Many people believe that the current downturn is the worst since the Great Depression and if that is true, we could easily see GDP fall by 4 or 5 percent in one quarter. In 2001, GDP contracted by 1.4 percent in the third quarter. In 1990, GDP fell by 3 percent in the fourth quarter and in the first quarter of 1982 GDP dropped a whopping 6.5 percent. There is no reason why the worst case scenario this time around is just a 0.5 percent contraction in GDP.

Remember That This is a Crisis of Confidence

However despite the pessimistic outlook for growth, it is important to remember that this was a crisis of confidence. So priority number one for the outgoing and incoming Presidents is to restore confidence. Since Friday they have done a good job with that if Obama outlines more plans at his speech later this morning, we could see the rally in the currency market continue. Don’t forget that the further monetary stimulus is also in the pipeline with the Fed expected to cut interest rates again next month.
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What are Paulson and Bernanke Saying?

Bernanke and Paulson are testifying before the House Financial Services Committee and these are their comments (this list will be growing as they speak, so check back often)

Bernanke’s Comments
– Some Signs Credit Market Are Improving
– Credit Conditions Still Far From Normal
– Injection of TARP Capital Critical to Confidence
– Banks Should Review Compensation to Curb Risk Taking
– Says Banks Should Set Appropriate Dividend Policies
10:26am ET Additions
– Revealing Borrowers is Counterproductive
10:56am ET Additions
– Overwhelming Amount of Fed Lending Quite Safe
– Fed Needs to Do What’s Needed to Keep System Viable
– Sees No Significant Credit Risk in Fed Policy
– We Need to Do A lot More to Prevent Foreclosure
11:21am ET Additions
– FDIC Foreclosure Effort Very Promising
– AIG Rescue is to Avoid Contagion of Losses
– Dollar Remains the Premier Currency
– Current Account Imbalances Very Serious Issue
– Foreclosures a Symptom and a Cause of Crisis
12:07pm ET Additions
Crisis Not a Failure of Capitalism

My Take: Nothing meaningful from Bernanke. He’ll be staying on as Fed Chairman so he has more of an interest in doing what is needed at this time than Paulson. He still thinks that there is a long road ahead to stabilizing the credit markets and confidence. No surprises there.

Paulson’s Comments
– TARP Not Panacea for All Our Economic Difficulties
– Rescue Package Wasn’t an Economy Stimulus Program
– Credit Recovery to Determine Speed of Economy Rebound
– No TARP Firepower Left to Buy Distressed Assets
– Economic Slowdown May Prolong Housing Slump
– No Plans for Using Remainder of TARP Funds
– See Modest TARP Funds Aiding a Fed ABS Facility
– Fed Facility Can Help Consumer Credit
– Best Emphasis for TARP is Capital Injections
10:26am ET Additions
– Financial Market Stress Hurts the Economy
– Economy Has Continued to Get Worse
– Our Purpose for TARP Was Protecting Capital Market
– AIG would have failed without Fed Stepping in
– Will Keep Looking for Ways to Ease Foreclosures
– We’ve Turned a Corner Stabilizing Markets
– Will Take A lot of Work to Revive the Economy
10:56am ET Additions
– When Facts Changed, We Changed the Strategy
– TARP Was Aimed at Financial System
– Not a Good Thing Having US Automaker Fail
– Automaker Solution Needs to Have Viability
– There are Other ways to Help Automakers
– TARP has Broad Definition of Financial Firms
– Auto Companies Fall Outside that Definition
– I Have Not Said No To Mortgage Help in TARP
– Working Hard to Prevent Windfall for Banks
– TARP in Process Developing Insurance Program
– No Decisions Made on Other Uses for TARP
– Definitely Capital Available for Some Firms
– Premature to Start Another TARP Capital Program
11:21am ET Additions
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Stocks Rally and Currencies Recover: Is this the Bottom?

The case for a bounce in equities this week was strong following the Lehman CDS Auction and the possibility of new measures from the G7 and G20 nations in Washington this weekend. New guarantees and a host of other announcements have helped to stabilize the financial markets and ease the credit crisis, but is this enough or are we simply seeing a light volume Columbus Day rally in US equities?

Banks and money markets are closed today, which means that we have yet to see the full reaction to this weekend’s announcements, but there is a good chance that this is a near term bottom that could lead to a move back above 9500 in the Dow as investors come in to scoop up stocks at fire sale prices.

Many of the liquidity problems in the financial markets have been addressed by the unified response from the G7 nations. The timing is also right because equities and carry trades have become so oversold leading investors to look for a reason to buy. Sentiment is extremely important these days and we have seen market sentiment shift from skepticism to hope, which should lead to a reversal in the strength in the US dollar and Japanese Yen. From the unlimited dollar funding to interbank loan guarantees, the efforts of nations around the world may be finally working.

In order for this to be the long term bottom in equities, two important hurdles need to be overcome – the Oct 21 settlement of Lehman’s Credit Default Swaps and the Nov 7 settlement of WaMu’s CDS. As counterparty A forks up payment to counterparty B for the protection of a Lehman default, bankruptcies is a strong possibility as those who fall into the counterparty A group fail to come up with the money. If there are no major bankruptcies that forces the US government to come up with another $100B to recapitalize an ailing financial institution, then the worst may be over (Here a great article on Who’s on the hook for the Lehman CDS mess).

Eventually everyone does the right thing and this is the step in the right direction for all of the major world economies. For the currency market, this means a correction in the US dollar and the Japanese Yen, but a recovery for carry trades and the Euro.

Now let’s get a little bit more specific on who announced what this weekend:
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