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TOPIC A : Tackling Toxic Assets

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Tuesday, March 24, 2009

Can Treasury Secretary Timothy Geithner, who yesterday unveiled a plan for dealing with toxic bank assets, restore confidence in the financial system? The Post asked some experts.

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SHANNON ZIMMERMAN

Senior analyst at the Motley Fool and lead adviser of the "Motley Fool Duke Street" service

Can Tim Geithner restore confidence? Maybe. When you spend a full two months systematically lowering expectations, anything is possible. But I don't think Treasury's latest plan will help his cause.

We've seen this movie before: It's called "Weekend at Bernanke's II," the sequel to the government's last attempt to privatize profit while subsidizing much of the risk. That's bad news for Geithner and even worse news for the rest of us: The longer President Obama waits to get those unburdened by cozy relationships with Big Banking on the case, the deeper the crisis is likely to become. Absent the plan's taxpayer-supported safety net, after all, there's a Snake River Canyon-size chasm between the value banks claim for their "toxic assets" and the sum any sentient, non-daredevil investor would pay.

Yesterday, banks had ample incentive to remain in strategic denial about the health of their balance sheets. Now they have even more. Paging Paul Volcker?

JOHN IRONS

Research and policy director at the Economic Policy Institute

I thought we were beyond the point where this (or any) Treasury secretary could simply, by virtue of the announcement of a new program, reinstill confidence in financial markets. But then I checked the stock market -- which was up about 7 percent yesterday.

In the long term, though, we're beyond a confidence game; Tim Geithner's plan will live or die based on whether it brings in new capital and removes bad assets from banks' balance sheets. The new plan could work. There was once a vast amount of money in these assets, and restoring that market through risk-sharing and guarantees could help stabilize the financial system. But it could also fizzle -- the assets might really be worthless (or close to it), and no public-private plan can change that. And that's not exactly a confidence builder. There is no way of knowing in advance.

In either case, Geithner (and the Fed) still have billions to use or leverage -- and the promise to use that power can move markets, confidence aside.

ADAM S. POSEN

Deputy director of the Peterson Institute for International Economics

Secretary Geithner's plan will help by removing some of the bad assets from banks' balance sheets. But he is trying to avoid asking for more upfront spending to fix the banks. Even in the best case, that makes it penny-wise, pound-foolish for the taxpayer. Private-sector investors get subsidies from the government in both leverage and insurance, and current bank shareholders get higher prices for their assets via these subsidies. Thus the plan ultimately may cost the taxpayer more than if the government had stepped in more aggressively to take full ownership and pay low prices for these assets.

More worrisome, this fix might only be temporary. The banks could still have too little capital, but fresh public money to play with and no change in incentives. Then we will just have to put capital into them again later, but after this money is squandered and the fiscal stimulus runs out.

LAURENCE FINK

Chief executive of BlackRock Inc.

Tim Geithner's announcement yesterday is a major step toward reinvigorating confidence and restoring liquidity to our capital markets. The plan takes aim at a fundamental problem: collapsing asset prices. Investors have been burned repeatedly and are now understandably wary. "Why not wait until prices hit rock bottom before we buy?" they ask.

Geithner aims to reverse that sentiment. The program will energize investors and boost prices in the capital markets, removing some of the overhang. And the program captures the upside for taxpayers, which is a major plus. There is no quick fix to our financial mess, but we must continue to tackle other serious problems: troubled loan books on bank balance sheets, falling home prices, rising unemployment. In the work ahead, Geithner and President Obama deserve -- and need -- our support.

DINO KOS

Managing director at Portales Partners LLC and former executive vice president at the New York Federal Reserve Bank

History teaches us that banking crises do not get resolved until problem assets are cleansed from banks' balance sheets. This element was missing from the succession of announcements from government officials over the past six months. That is, until yesterday -- when Tim Geithner announced a wide-ranging plan to deal with toxic assets.

Markets rallied globally. Only three weeks ago, Geithner was fighting back calls to nationalize the banks, which would have been much more costly for the taxpayer. He has now provided an alternative to nationalization that relies on market mechanisms. Coupled with previously announced plans to inject capital into the banking system, support small businesses, restart consumer lending and modify mortgages to prevent foreclosures, Treasury moved quickly to alleviate the deleveraging process the economy is going through.

Given the scale of the problems, some of the criticisms of Geithner have been unfair. Sure, some wounds were self-inflicted. But while some politicians posture for the cameras, Geithner has spent his time looking for solutions. As these plans gain traction, confidence in him may swing very quickly.

DAVID C. JOHN

Senior research fellow at the Heritage Foundation

Secretary Geithner can restore confidence by finding a clear strategy and sticking to it. He should avoid his predecessor's penchant for announcing new and improved programs every few days, a habit that undermined confidence. Ever-changing programs suggest the administration and Congress are simply reacting to events and have no real grasp of the situation.

An effective strategy would also limit government involvement to cases where it is absolutely essential. It may well be too late to avoid the nationalization of AIG, but Geithner should limit the government's involvement to situations that threaten systemic collapse. He should also publicly oppose government involvement in day-to-day business decisions. Financial firms are increasingly reluctant to join administration programs out of justifiable fear that doing so will result in micromanagement of their businesses.

Both the markets and the country are looking for assurance that a firm and competent hand is on the tiller. By limiting government intervention to cases in which there are no other alternatives, Secretary Geithner will show that he is executing a strategy rather than simply reacting to the latest events.


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