A Disappointing Financial Stability “Plan”

Treasury Secretary Tim Geithner announced the Obama administration’s financial rescue plan yesterday. The Administration calls this the “Financial Stability Plan.” The “Plan” has Paul Krugman confused. Krugman refers to it as “The Rorschach Plan.” Krugman says “It’s really not clear what the plan means; there’s an interpretation that makes it not too bad, but it’s not clear if that’s the right interpretation.” I think Krugman is being generous. A straightforward reading of the plan, as it exists on paper today, is not encouraging.

The “Plan” is notable for what it does not contain. It does not contain any help for homeowners struggling with foreclosure. Instead the “Plan” contains this bit of platitude:

There is bipartisan agreement today that stemming foreclosures and restructuring troubled mortgages will help slow the downward spiral harming financial institutions and the real American economy. Many Congressional leaders, housing advocates, and ordinary citizens have been disappointed that the Troubled Asset Relief Program was not aimed at ending the foreclosure crisis.

Thank heavens that there is “bipartisan agreement” on reality. The “Plan” goes on to say that they don’t have a plan yet to help homeowners but they plan to plan to help homeowners. The “Plan” declares: “We will soon be announcing a comprehensive plan that builds on the work of Congressional leaders and the FDIC.” So, now we have to wait for another plan to address the very issue at the center of the financial crisis that this “Plan” ostensibly was going to address.

And what will this future plan that this “Plan” plans to plan contain? This “Plan” offers some hints. These are:

• Driving down interests rates.
• Committing $50 billion to help prevent avoidable foreclosures by “helping to reduce monthly payments in line with prudent underwriting and long-term loan performance.”
• Helping to bring order and consistency by establishing mortgage modification “guidelines”.
• Requiring banks who take government money to work on foreclosure mitigation “plans” with government “guidelines”.
• Further expanding the worthless “Hope for Homeowners” program.

If after taking $700 billion of taxpayer money, and after giving away $350 billion of it to banks with no strings attached, Tim Geithner and the smart kids in the new administration have come up with the above plan to plan to prevent foreclosures, we are in very serious trouble. $50 billion will do nothing to stem the foreclosure crisis. Neither will giving banks “guidelines” and continuing the failed “Hope for Homeowners” program. If this “Plan” signals the plan to help homeowners by this administration, homeowners should expect no help from the Obama administration while watching the term “moral hazard” lose all meaning as failed bankers and their failed banks get bailed out for making disastrous financial decisions.

Of course, Tim Geithner probably could have looked at what the FDIC has been doing after taking over IndyMac Bank as a template for how to help homeowners and stabililizing the mortgage crisis. But this would require bad banks and failed bank executives to not be rewarded for their failures. The IndyMac experiment by the FDIC is a successful and ready template for how to approach the foreclosure crisis, but it would require the government to accept bank failures and not reward bank mismanagement.

Instead of tackling the financial crisis head on, Geithner’s “Plan” contains a reworking of Henry Paulson’s toxic asset buyout program (sold to Congress and then later abandoned) with a twist. This time, it is to be a public-private partnership in buying toxic assets. Of this scheme, Krugman says:

…as I understand it, private investors would be the junior partners, so this is probably not a big giveaway (unless there’s huge public financing, in which case it amounts to ring-fencing after all). I also suspect it wouldn’t accomplish much, but no harm, no foul.

In other words, at best it won’t help and at worst it will be another giveaway. I have to admit I fell for the Paulson plan back when it was announced, after initially having my doubts. In retrospect, I should have gone with my first instincts.

What the “Plan” does contain is something called a “Stress Test”. As I understand it, this is designed to find out the health of the banks’ balance sheets. Now, this could be the first step in taking over troubled banks and cleaning them (a la IndyMac), but I doubt it. The proposed “Capital Asset Program” designed to provide a “capital buffer” to banks that are found to need help after a “Stress Test” sounds a lot like the previous $350 billion giveaway. Why not simply cut to the chase and nationalize these failed banks? Why rely on the good graces of these banks who will receive vast sums of tax payer money to align their interests with that of the taxpayer? Why not just take control and ensure that taxpayer interests are protected until these banks can be steadied and resold? “Stress Test” and offering up “capital buffers” is slow walking to the inevitable nationalization. It would be better to save the taxpayer money and get the deed done without the added waste of funds.

On the upside, the “Plan” calls for “increased transparency and disclosure.” Transparency of course is a good thing. Taxpayers need to know where their money is going. But, transparency without accountability is like watching a car accident from the sidewalk in slow motion – you can see it happening but there is nothing you can do about it. Shame does not work on Wall Street.

Stemming the foreclosure crisis and unfreezing the credit markets needs to go hand in hand with the government spending in the Stimulus Plan if we are to come out of this spiraling downturn anytime soon. Tim Geithner showed yesterday that either this government doesn’t understand the severity of the crisis or it does not have the political will to tackle the banks head on. Saying you are for “Main Street” and not “Wall Street” is just rhetoric when your “Plan” says otherwise. Let’s hope President Obama and the smart economic team around him find the political courage to do the right thing for the American people. This “Plan” is not that right thing.