Is The PPIP Pure Piffle?

Pity Timothy Geithner - it seems that no plan that bears his imprint will ever meet the approval of the nattering nabobs. At least today, he has the comfort of having won the blessing - albeit temporary - of the markets.

But is his plan as bad as the critics claim? Does it really fail to address the key issue, as some say -namely that it's the state of the banks as a whole, not that of certain groups of assets (home loans, commercial real estate etc.) that needs to be addressed? That some banks are just in such bad shape that they need to be nationalized, then wound down - and that the Treasury's public-private investment program is just postponing the day of reckoning?

What the critics overlook is that the financial markets are still a train wreck. True, the stock market is up. Also true, investment-grade bond issuance is at a record for the current quarter. But equally true is that Asian investors have packed up and left the mortgage-backed securities market - and they aren't about to return. Private label mortgages - ones not guaranteed by the government in the form of Fannie Mae or Freddie Mac guarantees - are moribund, commercial real estate is in dire state - and a lot of those loans and securities sit on bank balance sheets. We aren't out of the woods yet; it's just that the markets that are visible have picked up some. And let's not forget the reason for that wasn't pontificating, it was vigorous government and central bank action. Meantime, starved of the oxygen of finance, the global economy is heading toward a full-scale recession this year.

So the Geithner plan is first and foremost a plan to help restart markets that, more than 18 months into the crisis, are still not working (remember, it was the early August 2007 admission by BNP that it was temporarily freezing three investment vehicles because it wasn't possible to value the asset-backed securities these vehicles held that got the ball rolling) and are doing untold harm to the economy. The key goal is to get private capital moving again.

Certainly, the signs are auspicious for the one leg of the Treasury's plan, the auction process for wholesale loans held by banks. As to the other leg, the one dealing with securities backed by home loans and commercial real estate loans, that will take a while to get going. But what the plan does do is get the credit machine rolling again. It will help the banks too, chiefly by buying them time to get their house in order.

Some banks could still fail - we are still in the thick of the woods. It's to be hoped that Congress makes good use of the room that Treasury has created to come up with a legislative framework for the bankruptcy and unwinding of a large financial institutions. It's been a year since Bear Stearns hit the skids - and the absence of such a framework became painfully obvious.

Enron, Bear Stearns & Treasury's Financial Stability Plan

The government is set to present the heart of its financial stability plan - how to deal with the toxic assets clogging up banks' balance sheets - a stark reminder how little progress has been made in dealing with the root of the financial crisis a year after the Bear Stearns bailout.
There's no harm in thrashing out the pros and cons of this plan yet again. But what is urgently needed - and what we are highly unlikely to get - is a sober debate of the big picture, the plan's framework. Transparency will once again fall by the wayside. The taxpayer will be asked to pay up, without being told what it is that we're taking on all this debt for, let alone being involved in the debate whether this is the best solution.

The arguments against the Financial Stability plan are easy to list and most involve practicalities. Private investors will be reluctant to lend because they fear arbitrary changes to the ground rules by populist lawmakers, no matter how cheap the funds are the government will offer them. Valuing these assets so that banks will be willing to sell them without overpaying for them remains a tricky issue. The mood right now is for solutions that work immediately - yet this plan is nothing if not complex and will take time to implement.

But of far greater importance is an issue that we seem to have lost sight of as the crisis has progressed: the need for transparency. We as taxpayers, whose full faith and credit are on the line, have a right to know what these purchases are that we are funding. The Treasury has a web site www.financialstability.gov. It should post the assets that are going up for sale there, including the prospectuses that the government will send out to investors. And please, spare me the "nobody would understand them, they are so complex" argument. It's irrelevant - all that matters is that anyone who is interested has the option to find out more.
What we can't have is a replay of Maiden Lane I - remember the $30 billion facility set up in June last year to take over Bear assets that JPMorgan's Dimon washed his hands off? It's faded into the mist of the financial crisis, but it's still there - just a bit diminished: at the end of 2008, the $30 billion - of which JPMorgan had put up $1 billion - had shrunk to $26 billion. Yet nobody except the New York Fed, JPMorgan and the portfolio manager Blackrock have any idea what's in that portfolio. What harm could come of making these assets public?

This insistence on obscurity is the biggest problem we face. The taxpayer must be treated as equal partner in the resolution of the financial crisis. Officials have decided that the best way to rescue the banking system and the economy is by reviving the shadow banking system - those obscure markets that allowed lenders to repackage loans and sell them on to third parties. But they have yet to explain how they arrived at this decision; they have yet to involve us, the taxpayers, in their discussions.

Off-balance sheet vehicles were instrumental in allowing banks to circumvent capital rules and take on far more risk than they should have - in a replay of what brought down Enron. They should have been banned in 2002, we are now paying for regulators' inability to act forcefully seven years on (we won't even ask where Congress was all those years. Those Congressmen baying for bonus recipients' blood should take a long, hard look at their own record.) These same regulators have now embarked on a strategy that revives those markets that allowed us to live beyond our means, borrow more than we could afford.

Is that the best plan we can come up with?