First of all, let's give the guy a break. The new U.S. Treasury secretary, Timothy Geithner, has been in office for all of - what? - two weeks? He is charged with fixing the most terrifying financial crisis in nearly 80 years. He is under intense pressure to do something big - and to do it fast.
It is not his fault that the night before his big speech, President Barack Obama held a news conference in which he raised expectations absurdly, more or less proclaiming that his Treasury secretary had the problem solved. As Geithner unveiled the outlines of his "Financial Stability Plan" the next morning, it quickly became apparent that it is still very much a work in progress.
Nor is it his fault that his voice conveys uncertainty, even when he is trying to sound bold and determined, while his brow seems to be permanently stuck in the furrowed position. Watching him, you can't help think: If he's that worried, how scared should I be? (A little media training might help.)
As for the fact that the stock market fell Tuesday after his speech, I can't think of a less reliable barometer of whether Geithner's set of ideas will work. The instantaneous judgment of the market is as meaningless as a thing can be. "A few hundred points up or down in the market today or next week isn't material to what's at stake here," said Daniel Arbess, who manages the Xerion hedge fund for Perella Weinberg Partners. "What is important is that the government get this right, because another false start risks triggering years of economic malaise."
Arbess added: "You've got a situation here that has been in the making for decades. Everybody knows it is complex. It's not going to be resolved in two weeks." Point well taken.
Second of all, we need to face the reality that nobody can say with any certainty what will work and what won't. Nobody knows - not Geithner, not Lawrence Summers, not Paul Volcker, not anyone in or out of the administration. It is difficult even to evaluate what has already taken place. Was the original $350 billion in bailout money wasted because bad assets were left on the books to deteriorate further while the taxpayers' money was used to recapitalize the banks instead? Or did the recapitalization stave off disaster, keeping the system from collapsing and buying time? I've heard both arguments.
The truth is, solving a financial crisis amounts to a kind of sophisticated, high-stakes guessing game. Every proposed solution also has the potential to backfire. As the bank chieftains who testified before Congress said repeatedly Wednesday - when they weren't either groveling or listening stoically to congressional scoldings - reigniting the banking system has to start with re-establishing confidence.
But confidence has as much to do with psychology as with shoring up balance sheets or dealing with bad assets. What will attract private investors? What will cause banks to start trusting each other again? How can they be made to feel secure enough to begin lending again? Nobody knows for sure. To his credit, Geithner acknowledged as much in his speech. He's going to need to keep saying it.
And yet, I still can't help thinking that Geithner is avoiding the most straightforward, obvious path out of the crisis. As I polled my Talking Business kitchen cabinet this week, gauging reaction to the Treasury secretary's plan, I kept hearing the same refrain.
"We've got to get on with it," said Christopher Whalen, the respected bank analyst who publishes the Institutional Risk Analyst newsletter.
"We need to take over the banks," said Joshua Rosner, a managing director of the research firm Graham-Fisher.
"When I talk to experts, after about two minutes they say, 'We should just nationalize,"' said Simon Johnson, a banking expert at the Sloan School of Business at the Massachusetts Institute of Technology. "That tells me that the consensus is moving in this direction, and we are all just afraid to say it."
Nationalization. I just said it. The roof didn't cave in.
Although Geithner's plan has been criticized for lacking details, the Treasury Department has put out enough information that you can get a decent read on it. The U.S. government is going to send in an army of bank examiners to put the big banks through a "stress test," to figure out how crippled they will be under various economic scenarios. It plans to gin up what was originally planned as a $100 billion program to revive the securitization markets. Now it is going to be a $1 trillion program.
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It is going to continue to shove billions of dollars in fresh capital into big banks that need it. At least $50 billion will be set aside for some kind of housing foreclosure mitigation program. And finally, it is going to create a "bad bank," funded with both private and government capital, that will begin to buy the toxic assets from the banks, and - this is the hope, anyway - create a liquid market that will allow them to be valued and traded. (There are also the usual vows of transparency, tough limits on executive compensation, and so on.)
Without question, this is the shock and awe approach to the banking crisis; the total amount the government is going to employ to get the banking system back on its feet is somewhere in the vicinity of - are you sitting down? - $2.5 trillion. The $1 trillion securitization program - the official name is the Term Asset-Backed Securities Loan Facility, or TALF - is especially important because at least half the lending that is done in America is securitized. Those markets are now dead; reviving them is critical to reviving lending.
The stress test, however, is the part of the plan that got me thinking about nationalization. Weeks ago, Daniel Alpert, a managing partner of Westwood Capital, and a charter member of my kitchen cabinet, sent me a proposal for solving the bank crisis that began with a stress test. Under his scenario, banks that failed the test - in other words, those that were insolvent once their bad assets had, as he phrased it, "more stringent marks" that better reflected their true value - would get all the capital they needed to meet minimum capital requirements. In return, the government would get 79.9 percent of the common equity.
His belief is that once it was clear that the government would not let these banks become insolvent - and the toxic assets were marked down to where they were finally attractive to buyers - investors would feel that it was finally safe again to put private capital into the banking system.
When I spoke to Alpert this week, he seemed pretty sanguine about the Geithner plan, largely because of the stress test. He thought it meant that the Treasury secretary was paving the way for a government takeover of one or more of the big banks, like Citigroup or Bank of America, which will in all likelihood be insolvent as the economy continues to deteriorate and their toxic assets are marked closer to reality.
But I'm not so sure about that. One clue came in the release the Treasury Department put out to explain the plan. In describing the stress test, it said, "In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending." That doesn't exactly sound like a tough-minded approach that will lead to realistic marks.
More important, Geithner simply doesn't seem able to get his head around the idea of nationalizing a big bank. As he told David Brooks, a New York Times columnist, recently, "It's very important that we don't look like there's any intent of taking over or managing banks. Governments are terrible managers of bad assets. There's no good history of governments doing that well."
But that's a canard. The government did a terrific job managing banks during the savings and loan crisis of the 1980s. It took over banks - "we called them bridge banks," recalled William Seidman, the former chairman of the Federal Deposit Insurance Corporation, with a chuckle - replaced the top managers and the board, stripped out the bad assets, which the government then managed brilliantly, and sold the newly healthy banks to private buyers. It turned out not be all that hard to find actual bankers who could run these S&Ls for the federal government.
Just recently, the FDIC took over IndyMac in California, which it ran for six months and then sold to an investment group. Although the FDIC had to absorb $9 billion in losses, that is hardly because the government managed the bank poorly. It is because the previous executives - the professional bankers! - had managed it so poorly.
Johnson, the MIT professor in my kitchen cabinet, used to work at the International Monetary Fund. Because of that experience, he is especially passionate about the importance of having the government take over insolvent banks. "This is exactly what the IMF tells an emerging-market country to do if it is facing a crisis - like Thailand in 1997, or Russia in 1998," he said. "It is not only simple and straightforward. It is also best practices."
Look, whatever solution winds up working, it is going to cost the taxpayers billions. That's a given. The S&L crisis - which was a piffle compared with what we face now - cost more than $100 billion by the time it was over. In return, shouldn't the taxpayer be the one to hold the majority ownership stake in the banks? And shouldn't the government have the right to decide that perhaps Ken Lewis should no longer be running Bank of America? And isn't the best way to protect the taxpayer - the mantra we heard all week long - to take control of what it is funding? It can be done right. It has been before.
Geithner deserves a chance to do it his way first. And we should pray that his plan works. It is far more pressing than the stimulus package. But we don't have a lot of time. Every month that passes without a healthy banking system means more jobs lost and an economy that slips deeper into recession.
"Americans can always be counted on to do the right thing," said Winston Churchill, "after they have exhausted all other possibilities." As we run out of possibilities, nationalization is looking more and more like the right thing.