Geithner plan wide in scope, short on detail

John W. Schoen Senior producer • Profile • E-mail

The comprehensive overhaul of the government’s financial bailout plan announced Tuesday is designed to succeed where other plans have failed by unifying a sometimes piecemeal set of policies. But as outlined by Treasury Secretary Tim Geithner, the plan was disappointing in its dearth of detail.

Since the financial crisis began unfolding in September, efforts to resolve it have involved multiple agencies including the Treasury, Federal Reserve and  Federal Deposit Insurance Corp. A shotgun approach to fixing the problem has tried everything from pouring money into the banking sector to helping homeowners renegotiate mortgages to save their homes.

“Everything was scattershot, hit and miss,” said former Fed governor Frederic Mishkin. “Now the feds have to go in big time and get this mess cleaned up. I think that there's an understanding in the administration that this is what needs to be done. But, boy, the details surely matter here.”

The latest plan, wide in scope, applies some fixes to existing measures and introduces a few new ideas. But as presented it is short on detailed solutions to some of most critical problems that have stymied past efforts.

Wall Street seemed to share that assessment. Although the announcement of the plan was anticipated for weeks, disappointment over a lack of key details contributed to a sharp sell-off in stocks, with the Dow Jones industrial average down 381.99 points for the day.

Geithner hinted in his speech that additional measures — and dollars — may be needed to get the global economy back on track.

“I want to be candid: This strategy will cost money, involve risk and take time,” he said. “As costly as this effort may be, we know that the cost of a complete collapse of our financial system would be incalculable for families, for businesses and for our nation.”

By underscoring the severity of the problem, Geithner may help lay the groundwork for calls for future sacrifices from voters — and additional spending from Congress. But keeping the plan open-ended also will extend the uncertainty that has undermined investor confidence as the government has moved from one policy to another.

“I think you've got to assume it’s the next step in the process, but I don’t believe it's the last stand,” said Anthony Fry, an investment banker at Evercore Partners. “”I think we are in a developing situation."

The Geithner plan covers four broad areas:

New capital for banks
As banks have lost upward of $1 trillion in mortgage-related assets, they have less money to lend — which has meant calling in old loans and cutting down on new ones. Until they can build up a more solid capital base, lending will remain tight and the economy can’t get growing again.

Last year’s Troubled Asset Relief Program was supposed to solve this problem by swapping those bad assets for cash or solid assets like Treasury securities. But since no one could figure out what the banks' bad assets are worth, the Treasury instead opted for a quick fix by giving them more than $250 billion in fresh capital in return for stock.

That drew fire from Capitol Hill and Main Street. After taking taxpayer money, banks showered bonuses on executives, paid dividends to shareholders and bought up other banks. The head of the TARP oversight committee, Elizabeth Warren, told a congressional panel last week that after handing out $254 billion, the government only got back $176 billion worth of stock. Critics also said decisions about which banks got funded were inconsistent.

The new plan will continue to provide capital and provide some increased oversight — including creation of a uniform “stress test” applied to any bank that gets money to see if it has the financial strength to survive the ongoing meltdown.

The process may also help the government come up with a better accounting of how much bad debt is out there, information banks have hoarded as tightly as cash.

But the plan stops short of applying hard restrictions on what banks can do with TARP money, including wider caps on executive pay. Instead, the Treasury will require more public disclosure on a Web site that will track where the money goes. The hope is that public disclosure will prompt bankers to adhere to the government’s goal of boosting lending to get the economy moving again.

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