Geithner's New Bank Fix Is Bogus, Too

[girl gone mad]

Geithner's New Bank Fix Is Bogus, Too
http://www.businessinsider.com/henry-blodget-geithners-new-bank-capital-plan-is-bogus-too-2009-5">The Business Insider

Tim Geithner has a clever new way to recapitalize the banks that failed the stress test: Convert the taxpayer's preferred stock to common stock.

From Geithner's perspective, this technique has several advantages:

• The banks will suddenly seem healthy, because their assets-to-common equity ratios will rise.
  
• Geithner doesn't have to ask Congress for more baillout money yet.
  
• Taxpayers won't understand that they're giving up a nice dividend and a safer security just to make the banks look better.
  
• If Geithner is right that what's wrong with the banks is just a temporary liquidity problem, the taxpayer should do well when the stocks rise. (We don't think he's right.)

Unfortunately, the plan also has two major flaws: First, it's smoke and mirrors. Second, the taxpayers are even more exposed than they are now.

Why?

Because the banks will still have the same amount of crap assets on their balance sheets, and they'll have no more capital available to absorb these losses. The only thing that will change is that the taxpayer will now get hit first as these losses flow through the balance sheet, instead of getting hit second, as is the case now. The banks' bondholders, meanwhile, will still be protected to the tune of 100 cents on the dollar (by administration policy). Which means that if the common equity is wiped out by the losses, the government will have to dig into the taxpayer's pockets to cover any shortfall. (See Paul Kasriel's detailed explanation below).

In other words, Geithner has hatched yet another plan to avoid dealing with the bank problem once and for all.

http://www.businessinsider.com/henry-blodget-geithners-new-bank-capital-plan-is-bogus-too-2009-5">More...

[pa28]

1. Another hidden transfer.

I'd have to disagree on what the writer sees as the real purpose. To me this looks like a way to subsidize a new equity offering in the market.

I guess this would explain some of language lately "inviting" banks to raise more capital. A strange idea considering there was no way they could raise enough capital themselves in a normal offering without destroying the share price.

[leftofthedial]

2. Geithner is a thief.

He should be stopped, removed from office and investigated.

What hold do the bank have over Obama that he allows this to continue? Or is he in on it too?

[tbyg52]

3. That's been my question from the beginning

I don't see any way to look at this except as a giant theft. Does Obama realize that or not? And I don't know which answer worries me more.

[FlyingTiger]

4. This has never, ever been a liquidity crisis.

Geithner's entire strategy depends upon the notion that the only reason housing prices have receded is because the banks don't have enough money to make even MORE loans.

So, tell me, people who don't live in an isolated, Wall Street-influenced bubble - if you've seen any of the data about just how inflated housing prices became over the past decade, do you think there's any chance that those prices were sustainable?

I sure don't.