Tuesday, February 10, 2009
vaporware, n., New software that has been announced or marketed but has not been produced. ... Software that is not yet in production, but the announced delivery date has long since passed.Today Treasury Secretary Geithner went to Congress and unveiled the long-awaited plan, from the guy who's so smart that we can just ignore tax laws. What did we get from him? Transparency, which means we get a new website. What's on it?
At the bottom of that page, however, there's a link to a seven-page pdf that actually smells like a plan. A comprehensive stress test, it says. A stress test means creating some relatively rare scenario or scenarios, and then doing a valuation model of the bank under those scenarios. They've been part of the Basel II framework for years. What does comprehensive mean, though? And it's not like we knew what the next crisis would be. Comprehensive might only mean all banks (over $100 billion of assets). I am not sure.
It's not clear from the document whether the regulators will do a full inspection of all the banks (like FDR in 1933).
Then I find this: While Geithner's statement says a public-private partnership, it looks like the capital fund comes from the government alone:
While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive �stress test� will have access to a Treasury provided �capital buffer� to help absorb losses and serve as a bridge to receiving increased private capital. While most banks have strong capital positions, the Financial Stability Trust will provide a capital buffer that will: Operate as a form of �contingent equity� to ensure firms the capital strength to preserve or increase lending in a worse than expected economic downturn. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution�s stock price as of February 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
Worse, there's very little in the way of clarity on the public-private investment fund (p. 3 of the fact sheet), and an apparently close relationship with the Fed. �Hamilton makes the point:
The Treasury is acting as though there's a sixth party who can step into the funding gap here in the form of the Federal Reserve. Once again, that will be OK if Plan A works out, that is, if things go well enough that the Fed's losses on any assets acquired and loans extended are limited to the TARP funds already authorized. But if not, we're back to the same calculation-- the Treasury must borrow (if foreigners remain willing) and taxpayers must ultimately pay the bill. Either that, or the Fed just covers the bill by printing money for the whole thing.The result is that all we have is vaporware -- a forthcoming multi-trillion-dollar product that has been marketed but not delivered. ("Marketed"? Yes. "...tomorrow my Treasury Secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again.") �Mark Thoma:
Geithner's attempt at reassurance, that they're not quite sure how the program will work, or if they will get it right, but be assured that they are determined to keep tinkering with the program until it does work, has just the opposite effect. It undermines confidence. Why not wait until they actually have a plan before going public?Because the boss said jump.