Geithner on How We Tested the Big Banks

Treasury Secretary Geithner is on a roadshow to prepare the markets for the results of the stress test.

Last night, he was on Charlie Rose (PBS) talking about the benefits of the stress tests:

There was also an Op-Ed piece in the NY Times written by Treasury Secretary Tim Geithner on “How We Tested the Big Banks.” Definitely worth read!

THIS afternoon, Treasury, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Federal Reserve will announce the results of an unprecedented review of the capital position of the nation’s largest banks. This will be an important step forward in President Obama’s program to help repair the financial system, restore the flow of credit and put our nation on the path to economic recovery.

The president came into office facing a deep recession and a damaged financial system. Credit had dried up, forcing businesses to lay off workers and defer investment. Families were finding it difficult to borrow to finance a new house, buy a car or pay college tuition. Without action to restore lending, we faced the prospect of a much deeper and longer recession.

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Geithner Needs to Learn His Lesson

How long does will it take for Treasury Secretary Tim Geithner to realize that his comments move markets? When he first took office, he mistakenly threatened to brand China as a currency manipulator. This caused a wave of volatility in the currency market and sharp criticism about the experience of the new Administration. And now, Geithner has done it once again (Geithner Comments send Dollar for a Ride).

Even though President Obama said that the dollar is strong and there is no need for a reserve currency, Geithner suggested this morning that the U.S. is “quite open” to China’s suggestion of moving towards a Special Drawing Right (SDR) linked currency system. But just as quickly as he made those comments, he retracted them probably because an aide told him that the U.S. dollar is tanking. Minutes later, Geithner said there is “no change in dollar as world’s reserve currency and likely to remain so for long time.”

These contradictory statements are clearly the act of an amateur Treasury Secretary that is forced to eat his words.

Why has the dollar had such a big reaction to these comments? Because if the world adopts the SDR, which was created by the IMF as an international reserve asset, it would mean less demand for U.S. dollars.

source: eSignal

source: eSignal

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Will the Treasury’s Plan Work?

The effectiveness of the Treasury’s Public Private Investment Program hinges upon whether private investors will take the carrot that the Treasury is offering them. In order to buy into the program, not only do private investors need to be confident that the assets will appreciate in value, but also that the U.S. government will not rescind on their offer or create some surprising rule like the retroactive tax on bonuses. Also, banks have to be willing to part with the assets, which may not make sense if they have already written them off. How Currencies are Reacting to the Treasury’s Toxic Asset Plan

Nonetheless, it is clear that along with the Federal Reserve’s Quantitative Easing program, the U.S. government is throwing everything including the kitchen sink at the U.S. economy and it could finally work. The only catch is that the program will probably not begin until the end of the third quarter because applications are not due until May.

Remember the words of Jean-Baptiste Say (1803), one of the world’s greatest economist: “In times of political confusion, and under an arbitrary government, many will prefer to keep their capital inactive, concealed, and unproductive, either of profit or gratification, rather than run the risk of its display. This latter evil is never felt under a good government.”

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Treasury Department Releases Details on Public Private Partnership investment program

Expect banks stocks to soar on this announcement. Geithner is slated to speak at 12:45pm to reiterate the details on the Treasury’s Public Private Partnership investment program to move toxic assets off bank balance sheets:

Fact Sheet
Public-Private Investment Program

The Financial Stability Plan – Progress So Far: Over the past six weeks, the Treasury Department has implemented a series of initiatives as part of its Financial Stability Plan that – alongside the Americ an Recovery and Reinvestment Act – lay the foundations for economic recovery:

* Efforts to Improve Affordability for Responsible Homeowners:
Treasury has implemented programs to allow families to save on their mortgage payments by refinancing, assist responsible homeowners in avoiding foreclosure through a loan modification plan, and, alongside the Federal Reserve, help bring mortgage interest rates down to near historic lows. This past month, the 30% increase in mortgage refinancing demonstrated that working families are benefiting from the savings due to these lower rates.
* Consumer and Business Lending Initiative to Unlock Frozen Credit
Markets: Treasury and the Federal Reserve are expanding the TALF in conjunction with the Federal Reserve to jumpstart the secondary markets that support consumer and business lending. Last week, Treasury announced its plans to purchase up to $15 billion in securities backed by Small Business Administration loans.
* Capital Assistance Program: Treasury has also launched a new
capital program, including a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. If banks are confident that they will have sufficient capital to weather a Continue reading

What Did Geithner Say and How Did Currencies React?

The Treasury Secretary has finally spoken and the markets are disappointed!

The price action in the currency markets suggests that investors are disappointed by the lack of details from the Treasury’s new Financial Stability Plan and are skeptical about the effectiveness of getting the private sector involved. Furthermore, investors are not happy about being apart of an experiment (although I think this is the only way to go because all of the old measures have proven effective).

Geithner announced a cocktail of initiatives using “things we haven’t tried before” and warned “that we will make mistakes.” If the Treasury Secretary is not 100 percent confident in his own plan, how could investors be?

Traders have plowed right back into the US dollar on the fear that the US government is rolling the dice once again. Equities have also fallen as much as 300 points.

The Treasury’s Super TARP plan, which is now renamed as the Financial Stability Plan has 3 core components:

1. More Capital for Healthy Banks

2. New Financing for as Much as $1 trillion of Consumer and Business loans

3. Public Financing for Private Investors Willing to Buy Distressed Debt (details of private/public investment fund have not been released)

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