Bank Rescue Plan Lacks Specifics
It was with little fanfare today that the Senate passed an $832 billion version of the highly anticipated economic stimulus bill. The proposal will now need to be compared to the version passed last week in the House of Representatives so that compromises can be reached before the plan can be implemented. The reason so little attention was paid to the passing of this bill in the Senate is that new Treasury Secretary Tim Geithner delivered a speech intended to outline a plan to relieve pressure from banks and get credit moving again. The speech turned out to be a major disappointment.
Stocks hit a three month low and plunged by almost 5% after Geithner spoke in generalizations about helping banks and unfreezing credit markets. Investors looking for reassurance were left with more questions than answers and the uncertainty led to heavy selling on Wall Street.
Geithner spent much of his speech reviewing the factors that led us into the mess we’re in, and little of it discussing a solution. There was a lot of blame, but not much talk of solutions. We learned that the Treasury will spend some time “stress testing” banks to see just how bad their financial situations really are before deciding how to proceed. He said that the Treasury was prepared to commit over $1 trillion in aid to banks, a number that is much higher than the $350 billion that remains in Troubled Asset Relief Program (TARP) funds. There was no work on where the additional funds would come from.
Geithner also stresses that any bank receiving money from the Treasury would have to disclose and account for what they do with the money after a lack of transparency and oversight led to worries that the first round of distributed TARP money was largely wasted. The new plan will also help homeowners by providing flexibility in mortgage terms and payment amounts, although again there were no specifics to this part of the plan.
There was no mention of whether or not accounting rules requiring banks to value assets at their true market value on a daily basis will be relaxed. Many were hoping for some loosening of the guidelines used to value toxic assets, many of which are sitting on bank balance sheets worth pennies on the dollar.
More details are sure to come and most of us understand that this is a problem that won’t be fixed overnight, but it will take time for the Treasury to restore the confidence that was lost today.
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Tags: economic stimulus bill, TARP, Tim Geithner, Treasury Secretary, Troubled Asset Relief Program, U.S. Treasury
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