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Davidson Deac II

Do we really need the Geithner bank rescue plan

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And will banks be willing to use it

Hey, I know the stock market loved hearing the details of the The Public-Private Investment Program. Huge rally. But consider this: 1) Obama-Geithner want to get these so-called toxic securities off bank balance sheets so banks supposedly will lend more; 2) the PPIP plan is predictated on banks agreeing to sell at some price to be determined by price discovery via subsidized private investment funds; 3) Many banks are not going to want to sell this so-called toxic assets which have cash flows and upside appreciation potential; 4) Regulators may push them to sell and take huge writeoffs; 5) This will require further capital injections, maybe $1 trillion; 5) Congress and public opinion show little interest in another ginormous bailout. Indeed, Congress has zeroed out Obama's $250 billion placeholder in the upcoming budget.

In addition to the points mentioned in the article, it seems that banks are starting to turn the corner even without this rescue package. Citi and BOA ran a profit the first two months of this year, Wells is hiring more people to process mortgages. I agreed with the first bailout, but I am not so sure that this one is necessary.

Banks are looking more closely at credit worthiness before making loans, and people are starting to save more money (both good things imo). I don't think we want to push them into making more bad loans.

Will banks even be willing to get rid of their toxic assets for the price that the government is likely to pay? Might end up that not much of the bailout fund gets used if the banks are unwilling to sell their assets for bargain basement prices.

On the other hand, my portfolio is doing much better since the announcement, so maybe it is a good thing. :)

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One Small Problem with Geithner's Plan: It Will Bankrupt the Banks

From The Business Insider, March 25, 2009:

The big problem with Tim Geithner's plan to fix the banks is the same as it ever was: The gap between what banks say their assets are worth and what the market says they are worth.

When a bank says an asset is worth 60 cents and the market says it's worth 30 cents, someone has to cover that spread. The genius of Geithner's plan is that it pawns most of the cost (and most of the risk) off on the taxpayer without the taxpayer noticing.

But unless the taxpayer gets stuck with the entire spread, which is probably what Geithner is hoping, banks that sell assets will have to take massive writedowns. This will start the whole cycle of violence again.

This risk to the banks is particularly acute when dealing with whole loans that the banks currently say they have no plans to sell. These loans are often carried at 100 cents on the dollar, because loans classified as held to maturity don't have to be marked to market. Even subsidized buyers won't likely be willing to pay anywhere near 100 cents on the dollar for these loans. So, here, the writedowns could potentially be huge.

And then there's another problem:

If the banks go through the exercise of putting assets up for sale only to have the bids come in at, say, 40 cents instead of the 60 cents on the books, the banks' accountants and/or federal regulators might notice. So even if the banks recoil in horror and refuse to sell at 40 cents, someone somewhere might insist that assets now carried at 60 cents be written down to 40 cents (after all, they won't have the "temporary illiquidity discount" excuse anymore, will they?). This will blow another huge hole in the banks' balance sheets.

Given this, banks would probably be wise not to participate in Geithner's plan.

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Well, one thing about it. If the banks are unwilling to participate, then the program will not cost all that much. :)

Well Jase left off the next sentence.

"Which is why the government is already talking about forcing them to:"

Those writedowns would be really bad, the last thing we need is for more assets to get the "toxic" label and start snowballing.

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Yeah, the banks are correcting their own screw ups...I think the infusion of cash at the offset might've been a good thing. Leave it to the government to make a bad situation worse, though.

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