Geithner's Bank Bailout Plan — It's Not Bad and It Might Just Work

By Mike Griffith, Staff Writer

Treasury Secretary Tim Geithner’s plan to deal with the problem of banks’ toxic assets is an improvement over the plan that was originally proposed by Bush’s Treasury Secretary, Henry Paulson, and it might just work.

The stock market posted a huge rally in response to the plan: 

Treasury Secretary Timothy Geithner’s plan to remove banks’ distressed assets cleared its first hurdle, triggering the fourth-best day for U.S. stocks since the 1930s. (http://www.bloomberg.com/apps/news?pid=20601087&sid=aleTA7vzVA2k&refer=home)

Bob O’Brien writes the following about Geithner’s plan in Barron’s today:

The plan calls for spending at least $500 billion and as much as $1 trillion to purchase those toxic assets, using equal measures of taxpayer funds, private investment capital and generous loans from the FDIC. The low interest-rate would make for an ideal lending environment, inasmuch as leverage would be accessible and inexpensive.

The plan offers some appealing features, not the least of which is that, by setting taxpayer and private investment sources equally, taxpayers will be afforded just as much upside as private equity would get, and those taxpayers wouldn’t be at risk of losing any more than those private investors would. The terms also suggest that the partnership wouldn’t overpay for the assets it purchased, because knowledgeable private equity investors will be conducting the negotiations. ("Bank Bailout Pays Immediate Dividend," http://blogs.barrons.com/stockstowatchtoday/ [scroll most of the way down on the page to see the article])

In an article titled "Why Liberals Hate the Geithner Bank Plan" in US News & World Report today, James Pethokoukis observes that, among other things, the Geithner plan will actually give more of the profits to the private sector than Paulson’s plan would have given:

3) Liberals are mad that private investment funds are involved. Many liberals speak scornfully of the so-called "hedge fund Democrats" such as Chuck Schumer who are pro-Wall Street and pro-globalization. The whole Geithner plan, in that it uses private investment money, smells like a creation of the hedge fund Democrats to make fat profits for their campaign contributors with little risk. Profits are privitized and risk is socialized. And why should Wall Street, which caused the problem, they argue, profit from fixing it? The big stock market rally only emphasized the point.

4) Liberals are mad Uncle Sam won’t get all the profits. I think this is the big one. Liberals aren’t worried that the Geithner Plan won’t work. They’re worried it will. See, when the Paulson Plan came out last September, the Bush White House insisted the scheme would eventually make money for the government since it was buying all these artificially undervalued, distressed assets that would one day rise in price. Former hedge fund manager Andy Kessler agreed, and publicly estimated that the $700 billion toxic asset buy could generate more than $2 trillion for the government. A few days later, New York Times columnist Tom Friedman was already spending that dough in an effort to "green the bailout", insisting the profits from the Paulson Plan be invested in a "smart transmission grid or mass transit." But the Geithner Plan splits the profits 50-50, and the government’s share may further be eroded by $750 billion in new capital injections. Not much money left over for a Green New Deal. (http://www.usnews.com/blogs/capital-commerce/2009/03/24/why-liberals-hate-the-geithner-bank-plan.html)

The Financial Services Roundtable is also positive about Geithner’s plan:

Geithner’s plan got an early and important endorsement from The Financial Services Roundtable, a trade group for the nation’s largest financial institutions. The group said the plan will help fix a value on the damaged securities, give flexibility to potential buyers and provide enough government-backed financing to make the plan work.

“Combined with other on-going efforts, the plan will help strengthen the economy,” the Roundtable said in a statement immediately after Geithner’s announcement. (http://www.politico.com/news/stories/0309/20370.html)

Geithner deserves due credit for crafting a plan that is more taxpayer-friendly and less reliant on government than the plan Paulson originally proposed.  There’s no guarantee Geithner’s plan will work, but even some conservative business experts believe there’s reason to hope that it will succeed.

Some Republicans, such as Senator Orrin Hatch and former Senator Fred Thompson, have been warning their fellow Republicans against calling for Geithner’s resignation, arguing that he’s pro-businesss and about as good as they can hope to get in an Obama administration.  Perhaps Geithner’s bank bailout plan justifies that sentiment.

For the sake of the country, not to mention my 401K and IRA, I hope Geithner’s plan works.