Sunday, April 05, 2009

CBS Face the Nation: Geithner on PPIP

by Calculated Risk on 4/05/2009 12:15:00 PM

Here is a CQ Transcript: Treasury Secretary Geithner on CBS’s ‘Face the Nation’. Here is a brief excerpt:

SCHIEFFER: Let me ask you about this plan you have put together to create these public-private partnerships to buy these toxic assets that these banks owned to get them off these bank books so they -- the idea is that, if they can do that, then they can start lending again.

But last week the government did change the accounting rules. So the banks can, in essence, put a different value on those assets. Some people are now saying that, with this in place, the banks may no longer want to sell those toxic assets.

So I guess the question is, can you get the banks to participate in this program?

And do you feel you have the power to force them to sell those toxic assets?

GEITHNER: Bob, banks have a large incentive, now, to clean up their balance sheets, to make it easier for them to go raise equity from the markets, from private investors. So they’re going to have significant incentives to clean up their balance sheets. This gives them a way to do that that did not exist before that.

Just as an example, you know, if you had to sell your home tomorrow, in a world where nobody could get a mortgage to buy your home, you’d have to sell at an enormously low price.

You’d reluctant to sell. You might end up keeping your home longer than you want, not moving to some -- to take a new job, where you can earn more money, going forward.

That’s part of what’s happening to our financial system today.

GEITHNER: So what we try to do is lay out a proposal for how to create a market for these loans, bring in private investors to help protect the government from not overpaying for these assets.

This is just part, though, of a broad set of programs to help address the housing crisis, make sure banks have enough capital to lend even in a deeper recession, make sure we’re providing direct lending to help get small business lending going again. It’s an important part of this -- part of this (inaudible) program.
Three comments (addressing text in bold):

  • The government did not change (Mark-to-market) Update: Mort_fin notes: FASB did change the rules on Other Than Temporary Impairments (OTTI) which is a big part of the story. FASB provided some clarifications to mark-to-market.

  • Geithner seems to be arguing that the toxic asset legacy asset issue is primarily a liquidity problem, and not a solvency problem. I think this is backwards - it is primary a solvency problem with some liquidity issues.

  • Geithner says one goal is to "make sure banks have enough capital to lend even in a deeper recession". The problem is the "more adverse" scenario is really not a "deeper recession" - it is the new baseline.