The first half of the $700 billion federal rescue of the banking industry has come and gone with little accountability or tangible signs of fresh lending to consumers or businesses.
Can we do better now? This morning, the Obama administration will introduce an allegedly new and improved use of the remaining $350 billion.
In his 11 a.m. speech, Treasury Secretary Tim Geithner will try to convey the merits of a revised strategy to Congress and, more important, a public growing increasingly skeptical of more funds potentially heading for another black hole.
Is this a case of "meet the new boss, same as the old boss" or a genuinely new approach? Here's what Wall Street favorite Barron's magazine said Monday: "The coming rescue plan for banks may prove hugely disappointing."
The odds are against Geithner. He better make a heck of a sales pitch.
Here's what we expect. Geithner's plan would be designed to attract profit-seeking private investors — from hedge funds and private equity firms to possibly even insurance companies — into the financial-rescue program to deal with the toxic debt clogging banks' balance sheets. By adding private funding, the feds gain more money (and perhaps will need fewer taxpayer funds) committed to the banking industry's woes.
Involving private investors also should make it easier to find realistic prices for buying and selling banks' bad debts. That will help jumpstart a market for these debts and lessen the risk to U.S. taxpayers.
If taxpayers overpay for bad debts, then they are wasting tax dollars and may not be able to recoup those losses later when the economy improves and those bad debts are sold. If taxpayers underpay, then the banks are still exposed to a potential loss.
Encouraging private investors also discourages the growing talk that the nation's big banks will be nationalized.
That, at least, is the theory and the hope.
Let's be clear. This is not the economic stimulus package that the Senate and House are working to pass and that President Obama on Monday tried to sell in Elkhart, Ind. (15.3 percent unemployed), and today will discuss in Fort Myers (10 percent unemployed). That package of $820 billion, give or take, is a new federal effort to stimulate the economy and generate new jobs to help offset the 3 million U.S. jobs lost in the last year.
Geithner's mission is to redirect the remaining $350 billion of the $700 billion committed last fall to stabilizing banks and Wall Street, and easing the credit crunch.
So Obama and Geithner are pitching two giant emergency rescue bundles, each aimed at different parts of the economy. Both seek the same goals. Stabilize first. Stimulate second.
Specifics of Geithner's plan have not been released, but there's a lot we know that is under consideration:
• A "bad bank" or not? While Treasury considered setting up a government-funded "bad bank" to buy toxic assets from banks, CNBC late Monday said the idea no longer seems to be on the table. The plan still contains steps to encourage private firms to buy up toxic assets.
• Fed financing and insurance: To motivate private investors to buy toxic assets, the feds would lend them funds during the credit crunch. The plan would also insure losses on loans banks made above a certain amount, perhaps the first several billion dollars.
• Still more bank injections: Banks still need capital to cushion against losses, so Treasury may make more direct investments — apparently with more accountability.
• Easing foreclosures: Obama reportedly wants to set aside between $50 billion and $100 billion to address the foreclosure crisis.
In the end, it's all about building confidence. Banks must become more confident to lend. Consumers and businesses must feel more confident to borrow. That never happened under former Treasury Secretary Hank Paulson.
Present a clear, precise and logical plan to bolster the banks, once and for all. That can go a long way to recovery.
Show us what you've got, Mr. Treasury Secretary.
Contact Robert Trigaux at [email protected]