Geithner Gets His Shot Monday At A Financial Bailout
New Treasury Secretary Timothy Geithner is expected to unveil his much anticipated financial bailout plan on Monday, February 9, and the market is waiting with bated breath. Following the spotty success of the bailouts from predecessor Henry Paulson, the market is hoping Geithner's plan will help restore liquidity and confidence in the financial system.
There has been much speculation about what Geithner's plan will look like, with much of that talk centered around a 'bad' or 'aggregator' bank that will take the toxic assets off the books of the nation's banks. There is also the possibility that Geithner's plan will center around government guarantees, through FDIC, on securities, loans, and other commitments of the banks. The most-likely scenario would be a two-pronged approach, with an aggregator bank for certain assets and FDIC insurance for others.
Some problems with buying the assets and placing them in an aggregator bank, include:
1. How will the bad assets be valued? Paying market value may be too low for the banks to accept and paying hold-to-maturity prices might leave taxpayers holding the bag on sour loans.
2. How will the marks be handled? If banks have assets on their books at $0.70 on the dollar and the government pays $0.50 how will the write-down be handled without hurting the capital level of the banks.
It has been a wild week for the biggest U.S. banks with talk of "insolvency" and "nationalization" swirling around the market. Today, Bank of America (NYSE: BAC) fell to 25 year lows early in the session on nationalization talk, only to rally back to close up 3% on word mark-to-market rules will be modified and some disclosures of insider buying from 5 executives including CEO Ken Lewis.
Investment-banks-turned-bank-holding-companies, Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS), have been higher the past few sessions as market participants think they will be in better shape under the aggregator scenario as the marks on their books are already very aggressive.
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