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Tuesday, February 17, 2009

WaPo on Geithner: Last Minute Course Change for Bank Bailout

by Calculated Risk on 2/17/2009 01:57:00 PM

From Neil Irwin and Binyamin Appelbaum at the WaPo: Late Change in Course Hobbled Rollout of Geithner's Bank Plan

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.
As the first week of February progressed, however, the problems with both approaches were becoming clearer to Geithner, said people involved in the talks. For one thing, the government would likely have to put trillions of dollars in taxpayer money at risk, a sum so huge it would anger members of Congress. Officials were also concerned that the program would be criticized as a pure giveaway to bank shareholders. And, finally, there continued to be the problem that had bedeviled the Bush administration's efforts to tackle toxic assets: There was little reason to believe government officials would be able to price these assets in a way that gave taxpayers a good deal.
This is surprising since all these questions were raised when Paulson proposed the original TARP. This approach was unworkable.

The real answer is to stress test the banks, and put them in three categories: 1) no additional capital needed, 2) some additional capital needed, and 3) preprivatization.

Hopefully the stress testing is underway - although William Black and Yves Smith say "There Are No Real Stress Tests Going On".

I think this is a misunderstanding of the proposed stress test process (although Geithner wasn't clear). My interpretation was the government will provide the parameters for the test, and the companies will perform the analysis (with a government audit) - so Mr. Black's suggestions about the lack of staff are probably not relevant. But Geithner was vague, and I'd like to hear more from him on the specifics of the tests - including a completion date.