Home OP-ED The Devil and the Taxman

The Devil and the Taxman

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A drum roll please …

With all the fanfare and build-up prior to his speech yesterday, you’d think that new Treasury Secretary Tim Geithner would have had more to say.

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Unfortunately, his silence about key details in his bank recovery program spoke volumes, and the market wasn’t in the mood to fill in the blanks. Rather than provide exact details about his plan, he ducked the tough questions, and the stock market made him pay the price.

The Dow fell nearly 400 points – its biggest drop since the New Year – following Geithner’s agonizingly spare presentation.

Investor doubts were driven by his failure to address three key issues at the heart of the banking crisis:

Geithner Impressive, to a Degree

• How will illiquid or toxic assets be removed from bank balance sheets?

• What will be done to stem the slide of home prices whose decline triggered the crisis?

• Finally, if banks receive a further capital infusion, how will the federal government decide which banks will be allowed to perish and which will survive?

Geithner did a fine job in presenting the broad strokes of his program. His manner and openness are a far cry from the gruff uncertainty of his predecessor. When the markets looked to Hank Paulson, who, as the former chief of Goldman Sachs, was one of their own, his stutter steps made him look more like a rabbit caught in the oncoming glare of an 18-wheeler.

Geithner’s program has three main elements: Injecting fresh government capital into some of the country’s biggest financial institutions; establishing a public-private partnership to buy as much as $1 trillion of banks’ bad assets; and starting a credit facility of up to $1 trillion to promote lending to consumers and businesses.

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The Treasury Secretary, however, was especially vague on how the government would determine which banks would be eligible for further federal assistance. He alluded to employing stress tests, a basic risk management tool used to determine whether a bank is solvent.

If this crucial metric had been applied prior to the massive infusion of cash into banks such as Citigroup, Bank of America or JP Morgan, it is likely that given the level of non-performing toxic assets each was carrying, any junior bank examiner would have pronounced them DOA.

Partnership Concept Troubling

It is a relief that Treasury, the FDIC and the Fed appear to be working out of the same playbook. Previously they were at counter purposes, with the Fed mostly engaged in cleaning up the mess made by Paulson’s seeming ineptitude.

Geithner’s allusion to a public-private partnership to sift out toxic assets to what is euphemistically been referred to as the “bad bank,” has left market watchers scratching their heads.

To the banking industry, and the investment community, these troubled assets are like nuclear waste that must be kept buried for a millennium. Prior to Geithner’s press conference, the perception was that the government’s mechanism to aggregate these toxic assets in one place would be the banking equivalent of Yucca Mountain.

Now Geithner is saying that he’s got a plan to rehabilitate these assets. But to investors, it like releasing murderers and rapists into the community with only a handshake and new suit.

During his televised press conference on Monday, the President demurred when he was asked to provide details about Geithner’s banking recovery plan. Mr. Obama said that he wanted “Tim to have his place in the sun.”

Mr. Secretary, follow your boss’s lead. The public wants more details.

That may be where the devil resides; but we’d rather know him than be surprised when he suddenly steps from beneath a cloak of mystery and ambiguity.




John Cohn is a senior partner in the Globe West Financial Group[ based in West Los Angeles. He may be contacted at www.globewestfinancial.com


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