Treasury Secretary Timothy Geithner formally unveiled the White House plan to clean out toxic assets from banks’ balance sheets on Monday, and investors gave it the equivalent of a standing ovation. Contrary to what happened in early February when Geithner first outlined the plan in such general terms that everyone was disappointed, stocks surged around the world yesterday. The Dow Jones industrial average jumped 6.8 percent, its biggest gain since October, suggesting that “investors bet that the government may have finally found a way to fix the nagging problem at the core of the financial crisis,” notes the Los Angeles Times. The Wall Street Journal says “the reaction seemed more a sigh of relief at seeing some details of the program, after weeks of waiting, than an overwhelming endorsement,” particularly since “much fine print is still to be spelled out.” The New York Timestakes the broadest look at the three-part plan that could end up purchasing “up to $2 trillion in real estate assets” and points out that it was “bigger and more generous to private investors than expected.” The Washington Posthears word that administration officials “made changes to the plan in recent days in a way that makes it more favorable to private investors.”
USA Todaygoes big with Geithner’s announcement but devotes its lead spot to a look at how certain industries and states have been able to continue hiring employees throughout the recession. The health care sector continues to grow and there’s demand for almost every job in the industry. “There are no nurses looking for work,” a spokeswoman for the American Nurses Association said. * The government and the energy sector have also been hiring. And while every state is suffering during the recession, some don’t have significant unemployment rates: Wyoming, Nebraska, Utah, South Dakota, and North Dakota.
Under the complex plan outlined by Geithner yesterday, the government would join forces with the private sector to purchase individual home loans as well as mortgage-backed securities. The Treasury will use up to $100 billion from the financial rescue funds already approved by Congress to match contributions made by private investors. The public-private ventures would get further help from the government through loans from the Federal Reserve and loan guarantees from the Federal Deposit Insurance Corp. These programs could buy as much as $1 trillion in public assets. In addition, the government could put $1 trillion more into the toxic assets by using the Term Asset-Backed Securities Loan Facility, known as TALF, which will be expanded to finance existing troubled securities.
Investors were largely enthusiastic, or at least some were. Almost all the papers quote Bill Gross, the co-chief investment officer of Pimco, the nation’s largest bond investor, calling the program “perhaps the first win-win-win policy to be put on the table.” Investors do have plenty to be optimistic about since “the Treasury was offering to lend up to $6 for every $1 of investors’ own money,” as the NYT explains, which means taxpayers would lose the most if the investments turn sour. The WP, which is the most openly skeptical about the plan,says some analysts think the government may be handing out too much of the potential upside to investors when it should be going to the taxpayers. The program also involves a major risk considering that if the Treasury uses all of the $100 billion from the $700 billion bailout plan, there will only be $12 billion remaining, which means Geithner will have fewer options if another financial institution desperately needs cash to survive.
The WP and LAT highlight that the program simply might not work, considering that it’s unclear how the government would persuade banks to sell assets if they see the prices as too low. USAT points out that in “prior situations in both the USA and abroad, governments have forced banks to sell their bad assets.” The paper also says that the typical buyers of securities, such as hedge funds, don’t have much cash lying around so it’s likely that the biggest buyers would be so-called vulture investors, who would only be interested in the securities if they’re real cheap, something banks may not be interested in since it’d mean they’d have to record big losses in their books.
The WSJ says there’s currently “a chess match of sorts” that is playing out between banks and investors. Banking executives are reluctant to sell assets at a deep discount since that could force them to raise more capital. Experts say banks that have already taken write-downs on their assets could be more willing to accept a cheap price for their assets. The LAT quotes the lobbyist of a financial trade group who says that even if many banks refuse to participate, the program should at the very least determine a market price for toxic assets. A shortage of information on how much these assets might be worth is part of the reason why the credit markets have seized up over the last few months.
In a separate front-page piece the NYT says the positive reaction to the White House announcement gave the “embattled” treasury secretary “a critically needed boost.” Even though Obama has been insisting that he has full faith in Geithner, he has suffered several missteps throughout his brief tenure, so it must have been more than a bit of a relief to see things go his way for once. Of course, there’s no guarantee that the good feelings toward Geithner will continue, but it at least shows that the administration learned from the disastrous unveiling of the plan last month. This time around, the administration devoted lots of efforts to carefully releasing the plan over several days to key Wall Street insiders and obtaining endorsements from two leading global investment firms, BlackRock and Pimco. It’s hardly a surprise then that these companies were ready with statements of support as soon as the plan was unveiled, which the media gobbled up.
In a piece inside, the LAT points out that one key difference between yesterday’s announcement and the one in early February is that this time around, Geithner didn’t make the announcement in front of TV cameras, and the administration “effectively reduced the secretary from point man to staff briefer.” That fact may seem like a bit of inside baseball. After all, if investors liked what Geithner had to say, who cares how he said it? But it points to what the LAT calls the “worrisome fact” that besides Obama, the administration “has yet to find a commanding figure who can carry economic policy messages and inspire confidence in White House prescriptions.”
The lack of a clear communicator on economic issues may be partly to blame for the dearth of explanations coming from the White House about what’s going on and why certain plans were chosen over others. Inside, the WP points out that even as Wall Street celebrated, other experts were holding back and were expressing skepticism about the plan, noting there are several other ways to fix the system that could ultimately be more effective. But most also agreed they might be more open to the White House plan if the administration took a time out to explain things more carefully rather than presenting their decisions as the only viable choices. “I think they would inspire much more confidence if they explained their rationale,” one expert said.
The WP fronts word that the White House is “considering asking Congress” to allow the treasury secretary to seize a whole slew of financial companies, including hedge funds and insurers, if their collapse would threaten the economy as a whole. Currently, the government only has the authority to seize banks. This would “mark a significant shift from the existing model of financial regulation” because someone in the president’s Cabinet would have authority over companies that are currently overseen by a number of independent agencies. Geithner is set to talk about the issue today at hearing on Capitol Hill that will focus on the American International Group bonuses. Some think that if the government had been able to seize AIG when it was clear that the insurance giant was in trouble, the whole process of winding down its operations could have been cheaper for taxpayers. If the treasury secretary had this power, it could take a number of steps to prevent a firm’s collapse, including, significantly, breaking contracts.
The NYT fronts, and everyone covers, news that New York Attorney General Andrew Cuomo said that nine of the top 10 recipients of retention bonuses from American International Group agreed to give the money back. Cuomo said he’s still working on convincing bonus recipients but so far has managed to get commitments to return $50 million of the $165 million that went to the insurer’s Financial Products unit. Meanwhile, the Senate has put on hold the legislation that would have placed a large tax on bonuses. It seems lawmakers are willing to put the legislation aside for now, particularly since Obama expressed skepticism about the proposals.
In an op-ed piece in the LAT, President Obama writes that the “leaders of the G-20 have a responsibility to take bold, comprehensive and coordinated action that not only jump-starts recovery but launches a new era of economic engagement to prevent a crisis like this from ever happening again.” No country can hope to bring an end to the crisis in isolation, and that’s why coming up with a coordinated strategy at next month’s summit in London is so important. Countries must resist their protectionist impulses, and take this opportunity to “advance comprehensive reforms of our regulatory and supervisory framework.”
The bad economy is sending people to the candy shop, reports the NYT. So-called “nostalgic candies” like Necco Wafers and Mallo Cups are particularly popular, and customers seem to prefer “cheaper, old-fashioned” sweets, which is a significant reversal from last year when mass-market candies were losing ground to luxury brands. Many candy makers are reporting surprisingly healthy profits and stores say they’re struggling to keep up with demand. The owner of a candy store in San Francisco said it best: “All is well in candy land.”
Correction, March 25, 2009: This article originally attributed a quote from a spokeswoman for the American Nurses Association to the head of that organization. ( Return to the corrected sentence.)