Words tell the story.
What we call things matters.
Take the term “legacy.”
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It inspires a notion of awe and grandeur. Legacy paints the picture of a great heritage or cherished bequest. A legacy often refers to a privileged birthright or rare inheritance.
But a legacy also can be a millstone or a sinister curse hidden in the dark recesses of our family tree. Ask poor old Count Dracula. If given a choice, do think he’d have chosen a life as a blood-sucking vampire? Who knows? He could have been a dentist or even a successful hedge fund manager.
The Obama PR machine understands the significance of words, and the images they gin in the public perception. This morning, after much investor angst, the administration finally hung flesh on the bones of Treasury Secretary Tim Geithner’s toxic asset buy-out program.
Time Out for Irony
In an almost mocking twist of words, the Treasury’s two-part public-private plan has been paradoxically christened the “Legacy Loan” and “Legacy Securities” programs. Simple yet sublime; a touch of bitter irony mixed with a smattering of sardonic poignancy.
The Legacy plan is aimed at financing as much as $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. This public-private investment program also will rely on Federal Reserve financing and Federal Deposit Insurance Corp. (FDIC) debt guarantees.
The administration’s announcement provides details on an initial strategy laid out by Geithner last month, which caused a slump in stocks because it lacked an explanation of how the effort would work. Although the plan invites private investors with a promise of leverage ratios as high as 6-to-1, most of the risk still is being assumed by the taxpayer.
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This program stops short of the bank nationalization advocated by several leading economists, including The New York Times columnist and the 2008 Nobel winner Paul Krugman. Krugman, a professor of economics at Princeton, has been a vocal proponent of the 1990s Swedish model where the government took over troubled banks, removed their top management and disposed of their toxic assets.
Krugman’s chief criticism of Geithner’s Legacy plan is that it assumes that the banks are fundamentally sound, and that the bankers running the show know what they’re doing. Based on the train wreck that has become our banking system, Krugman and his colleagues may have a point.
Has Market Bottomed Out?
Despite its detractors, the plan seems to have curried substantial favor with investors. European, Asian and emerging market stocks have climbed for the third consecutive day, while Wall Street is continuing it two-week rally with the Dow up more than 200 points on the opening bell.
The dollar also recovered some of its footing after having given up nearly 7 cents to Euro and about 5 cents to the Yen. It’s up about a penny and a half overnight with gold holding steady at roughly $950 an ounce.
Several of the more optimistic professional prognosticators believe that the stock market has found a bottom. Others, such as mutual fund giant Fidelity, remain relatively uncertain.
Today’s announcement by Treasury also seems to have pushed the flap over the AIG bonuses below the fold; obviously a relief for a President who has been fielding flak and trying deflect public infuriation during the past week since the news stories about the $165 million payout broke.
The plan calls for Treasury to select a group of private asset managers with a “demonstrated track record of purchasing legacy assets.” Geithner, however, didn’t specify whether their track records had to be good or bad.
According to Treasury, the asset managers probably will not come on board until May. At that point, they will be given additional time to raise private capital to match the Treasury outlay. In all likelihood, this means that it will be at least mid-summer by the time until any of the toxic assets can be absorbed into the economy.
Until then, the burning question is whether we can hold on while we wait for the economy to be finally unburdened of this toxic legacy.
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
