For one day anyway, Treasury Secretary Timothy Geithner was back in Wall Street’s good graces.
At least that was the snap reaction to the new $1 trillion public-private bank bailout plan Geithner unveiled yesterday – a nearly 300 point spike in the Dow Jones Industrial Average.
The White House always warns about reading too much into the ups and downs of the stock market. But even President Barack Obama’s aides must have been breathing a sigh of relief to see the real-time Dow ticker headed upward after Geithner’s big announcement.
That’s because the last time he announced a bailout plan in February, the Dow went in the opposite direction. The market closed down that day by 380 points amid concerns that the plan lacked specifics, and that Geithner himself seemed unsure and ill at ease.
It’s a reputation Geithner has been battling since that day, and into last week, when he was pummeled by questions over why he didn’t do more to stop AIG’s $165 million in bonuses.
But he seemed to find his footing on Monday, coolly handling a barrage of questions about a new bank bailout plan to buy up to $1 trillion in so-called “toxic assets.” “Our job is to fix the problem in the financial sector at the least risk to the taxpayer," he told reporters.
He also acknowledged the intense public anger over the sense that Wall Street is benefiting from the bailouts even as average Americans suffer: "That anger and outrage is perfectly understandable," he said. "We have to make sure our assistance is not going to reward failure."
Geithner announced a plan Monday that would use $75 billion to $100 billion in taxpayer dollars from the initial Wall Street bailout, plus money from private investors, to generate $500 billion to buy up the assets from troubled banks. That amount could increase to $1 trillion over time. Those are mainly mortgage-backed securities whose value has cratered, but they remain on bank balance sheets and are blocking further lending.
The administration is facing resistance from the potential buyers and sellers in the new program, as well as criticism from the left that the proposal is a rehash of old Bush Administration ideas. Geithner deflected criticism that his proposal didn't go far enough. "We are the United States of America. We are not Sweden. We have a very complicated financial system," he said.
A lot was riding on Geithner’s announcement – both the fiscal health of the nation’s crippled banking system, but also Geithner’s own reputation. He’s been battered by a series of missteps that have left some Republicans calling for his resignation, even as President Barack Obama is standing solidly behind him.
Obama gave Geithner a vote of confidence again in remarks Monday, praising the new bailout plan as “one more critical element in our recovery. But we've still got a long way to go, and we've got a lot of work to do. But I'm very confident that, with the team that we've got assembled, we're going to be able to make it happen.”
Geithner’s plan won an early and important endorsement from The Financial Services Roundtable, a trade group for the nation’s largest financial institutions. The group said the plan will help fix a value on the damaged securities, give flexibility to potential buyers and provide enough government-backed financing to make the plan work.
“Combined with other on-going efforts, the plan will help strengthen the economy,” the Roundtable said in a statement immediately after Geithner’s announcement.
The administration signaled that it understood the high stakes around Monday’s announcement for Geithner – sending him out brief reporters without cameras rolling, in a so-called “pen and pad” briefing.
The absence of television crews seemed tohelp Geithner, who has been criticized for his sometimes-awkward on-camera delivery. The absence of most of the politically minded White House television correspondents allowed the technically minded print reporters to dominate the question and answer session, and kept to detailed terrain on which Geithner seems most comfortable. He was not asked about the questions surrounding his own performance.
In fact, Geithner did not seem to be a man whose job is on the line. Although the White House has been forced to issue repeated statements of support for Giethner, the treasury secretary appeared confident, spoke without a prepared script, and fielded detailed technical questions.
Geithner’s plan is similar to an idea that was originally the foundation of the initial Wall Street bailout, proposed by former Treasury Secretary Hank Paulson. But then Paulson shifted course after the legislation was passed and used the money instead to provide funding directly to the struggling banks.
Geithner emphasized that the plan he announced today is the best of several bad options. He said the alternatives would be to either; do nothing, which could result in a depression, or for the government to simply buy up the toxic assets directly, which he said would leave the taxpayer with dramatically more risk than his proposal.
Geithner said he believes that financial institutions will do a better job of setting a price for the toxic assets than the government could do, largely because they will have their own money at risk. And he said that he believes there will be buyers for the assets — even though sellers have not been able to unload them for months. “We’ve seen a lot of interest from the private sector,” he said, cautioning that there would be criticism from potential buyers that the government was not taking on enough risk. He described the financing structure this way: “A dollar of capital from Treasury, alongside a dollar of capital from private investors, financing from government on top of that. For that financing to be at risk, the private investor has to lose all its equity.”
Ahead of the announcement, potential sellers of the so-called toxic assets, generally the large banks that are already participating in the government's TARP program, complained that they hadn't been given enough notice of the program in advance last week. One financial services executive said on Sunday that banks still hadn't gotten an explanation of why they ought to participate in the program as of late last week, leaving very little time to digest the details before its public unveiling.
Potential buyers of the assets, largely hedge funds, worried that Washington' intense focus on executive pay could turn on their own enormous earnings, or that Congress could change the terms of the deal after the fact, as it tried to do when the House approved a 90 percent tax on bonuses, spurred on by public outrage over AIG’s $165 million in bonus payouts.