Courtesy of TIME
The Bank Rescue Plan Is in Limbo. Is This Good News?
When Treasury Secretary Timothy Geithner unveiled the details of his plan to save America’s banks a little over two months ago, the markets raved, the country sighed with relief and Geithner went from punchline to potential hero overnight. Now, the plan is in trouble, as parts of it struggle to get off the ground and others are dead in the water, administration officials say. But oddly that may be good for Geithner, too.
The bank plan is supposed to be getting under way right about now, with private players lining up to tap government lending facilities to buy so-called toxic assets from banks, thereby cleaning up the banks’ balance sheets and facilitating lending across the country. But the banks have never been very enthusiastic about selling the assets, convinced the market was undervaluing them, toxic or not. (See 25 people to blame for the financial crisis.)
The Administration’s stress tests were intended in part to force the banks’ hands. By having regulators officially dictate how much capital big banks needed to raise, the government thought it could make the banks sell the toxic assets into the "public-private" buying scheme.
Instead, the banks just went out and raised capital from private sources: $65 billion in a matter of weeks. On Tuesday Bank of America announced it alone had raised $33 billion of the $33.9 billion the feds had required it to. J.P. Morgan also announced new plans to sell stock. Part of the motivation for the banks is to get out from under government constraints — Congress has passed strict limits on executive salaries, bonuses and other benefits bankers love to love.
As it turns out, that’s part of the reason the banks are still resisting selling into the public-private program. "The government plan continues to face a number of hurdles, including too much government overhang," says Scott Talbott of the industry group the Financial Services Roundtable. Government officials say the language in a recent Senate bill requiring recipients of government "public-private" dollars to submit to oversight by the special investigator of bank-bailout funds is scaring away both sides of potential deals. "We’ve run into reluctance on the part of buyers and sellers," says one official. (See pictures of retailers that have gone out of business.)
The situation has become bad enough that the FDIC, which is responsible for the "legacy loan program" to remove toxic loans from banks books, is considering alternative plans to the one rolled out at the end of March by Geithner. A senior Treasury official says the legacy securities program, which is intended to handle toxic securities, is "chugging along nicely" and that they are seeing "interest on both sides" of potential sales. The official says while some banks may be reluctant to participate, Treasury is not worried.
Why not? When the legacy loan and securities programs seemed unworkable in February the market collapsed. But Treasury officials and the market now believe the banks aren’t in as bad shape as everyone thought back then. The fact that they can raise so much money from private sources means confidence is returning to the markets and credit is loosening up. "Success to us is that the system gets better, healthier," says the senior Treasury official, "Whether they sell into something we create or not doesn’t matter to us."
Which is fine as long as the banks are actually as healthy as everyone now seems to think they are. But if they aren’t, the toxic assets will once again become a dangerous threat to confidence. And the government will be back to trying to figure out how to get the bankers to sell them.
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