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Journalism of Courage
It was a measure of the desperation for a plan-any plan-to tackle the paralysis in the American banking system that stockmarkets soared on March 23rd when Tim Geithner,the treasury secretary,detailed his proposals to purge toxic debt from the banks8217; balance-sheets. In fact,the effort to recruit private investors into a government-led campaign to buy bad assets from the banks is still,at best,half a plan. It is better than Mr Geithner8217;s woeful false start in February and may one day even prove to be inspired. But it will work only if the Obama administration accompanies it with a cast-iron determination to get to the bottom of America8217;s banking mess. So far the president has shown little stomach for going the whole way.
As it stands,Mr Geithner8217;s Public-Private Investment Programme looks like an ungainly political and financial fudge and far from the market solution the government claims it is. It aims to buy 500 billion-1 trillion of the loans and hard-to-value securities that have swamped the banks8217; balance-sheets since the collapse of America8217;s mortgage market in 2007. Ideally,the government would have raised that money from Congress and parked the toxic assets in a discrete 8220;bad bank8221;,or offered to guarantee them. But Congress has bail-out fatigue. Bonus-bashing scores immeasurably higher with voters than adding to the 700 billion earmarked to buy bank assets last October. Of what is left,Mr Geithner has a relatively thin 100 billion for his Augean clean-up. Beyond that there is less than 100 billion in the kitty.
Hold your nose,however. Mr Geithner8217;s proposal is worth a try,not least because,as any leader at the Group of 20 summit in London next week will tell you,fixing American banks is one of America8217;s and hence the world8217;s most urgent economic priorities. However unpalatable it is to shower public largesse on big vulture funds,one of the few ways to see if there is any residual value in all the toxic waste left on the banks8217; books is to induce someone to buy it. Without a subsidy,there are many reasons for private investors to hold back. Above all,they do not have the same information advantages as the seller,which is only too keen to offload the worst assets on its balance-sheet while hanging on to the good stuff. The trouble is,the proposal barely has a hope unless banks agree to sell assets,and therein lies Mr Geithner8217;s unfinished task: arm-twisting them to do so. Many banks value their assets well above the prices they would fetch in an open albeit illiquid market. They have incentives to keep them there: the lower the price,the more capital they need to raise; in these capital-constrained times,that means the closer banks are to insolvency.
Come on,Tim
But if America wants to avoid the fate of Japan in the 1990s a lost decade of zombie banks it is vital that its banks face reality. Mr Geithner has a ready-made tool for that,about which he has been mysteriously quiet of late: his stress tests to determine whether America8217;s biggest banks have enough capital. Done rigorously,the stress tests could force the banks to come clean about their balance-sheets and lead to the forced sale of assets into the government8217;s toxic-asset programme. If a bank cannot raise the capital to offset its losses,it should be deemed insolvent and temporarily nationalised. Mr Geithner8217;s proposal is part of a process that could lead to more certainty-even healing-in America8217;s banking system. But only if he has the gumption to turn his half-plan into a whole one.
The Economist Newspaper Limited 2009
