Newly-minted U.S. Treasury Secretary Timothy Geithner did not talk about the Obama Administration’s comprehensive financial rescue plan last week, or yesterday. It just wasn’t ready. He’s expected to make a statement today, and to testify before the Senate Banking Committee this afternoon, revealing an outline of the plan. Financial market participants are not complaining about the delays, but instead are praising the administration’s caution. “I do think it’s calming,” says Dory Wiley, president and CEO of Commerce Street Capital, a privately-held investment bank based in Dallas, TX. “But it may be a false calm, a false sense of security. Everyone is looking to government for solutions. People forget that the
solutions don’t all lie with government.” Wiley also notes a “false sense of high expectations—people want things back to how it was, and that’s just unrealistic.”
A general framework of the White House initiative has emerged. It reportedly will include some kind of government/private sector bad bank designed to soak up abhorrent, loss-inducing assets; more capital infusions into the banking system, with stricter accountability; foreclosure relief combined with national loan modification rules; and a push for increased lending, possibly tied to the Federal Reserve’s Term Asset-Backed Securities Loan Facility.
The Fed unveiled more detailed terms and conditions for TALF on February 6, including haircuts ranging between five percent (for securities backed by certain small business loans, SBA loans, and prime bank card loans) to 16 percent (for securities with an expected life of 4-5 years backed by auto floor plan loans). Wiley is not convinced that this attempt to restart the moribund capital market will succeed. “Securitization is a leverage issue,” he explains. “The market is not ready, and the demand is not there.”
Turning to TALF as a lending machine is misplaced, continues Wiley: “Congress says, ‘give us lending,’ but you can’t make people lend. If you make banks lend, then fudging on underwriting standards creeps in.” The government should “focus on systemic risk, not lending,” he adds. “They’re getting ahead of themselves, and jumping in front of a falling knife.”
Wiley believes that the idea of a private/government bad bank is bound to fail. “The government would have to finance it. There’s no way they’d get private investors,” he says. And the idea of government guarantees or stock conversions might not be as helpful as hoped. “Remember what happened to Fannie and Freddie? Investors said, ‘why put any capital in them,’ and they were de facto nationalized.” He supports “more capital injections for large cap banks to the extent we reduce systemic risk, but not to protect shareholders. We could nationalize the big failing banks like Sweden in 1992, stabilize them, and then conduct an orderly sale or offering. It could be pretty good for the government,” says Wiley.