The Bush/Paulson solution failed …

Henry Paulson, the Secretary of the United States Treasury went before Congress and the American people and claimed that if the TARP (Troubled Assets Relief Program) legislation was not passed, we were sure to experience a financial system meltdown of catastrophic proportions.

As time went on, we were to learn:

• The $700 BILLION number was picked from a hat; a number that sounded serious and substantial and less than a psychological barrier of $1 TRILLION.
• After approximately half of the TARP funds were disbursed, we found out that the money was being spent by the banks to acquire other financial institutions or shore up the balance sheets of the recipient. Little or no money actually went to facilitate consumer or commercial lending.
• In a pitch for the remaining funds, Paulson admitted that there were problems with the initial TARP fundings but that he needed the remaining money to avert a catastrophe in the financial markets. He also acknowledged that the banks were not, as a condition of receiving TARP funds, required to report to the Treasury Department exactly how these funds were allocated.

Time for the messiah …

Exit the Bush Administration and Treasury Secretary Paulson and enter the Obama Administration and Treasury Secretary Timothy “TurboTax” Geithner.

One would assume that Geithner, head of the New York Federal Reserve, close associate of Federal Reserve Chairman Bernanke, and one of the authors, with Treasury Secretary Paulson, of the TARP program would have a plan in place to distribute the remaining TARP funds and deal with the additional BILLIONS allocated in the Obama Stimulus package.

Winging it …

And now we find that Geithner, too, plans to wing-it with little or no real disclosure and a program of public utterances that are Obama-like in that they say little or nothing about the problems at hand, but simply quote the dire consequences of inaction.

Saying nothing of substance: Tim Geithner, in his own words …

The market doesn’t believe Geithner gave a credible answer…

In response to a presentation which featured a broad overview of the problem and very little of substantive detail of an estimated $1 TRILLION program, the market reacted;  the Dow industrials falling by 381.99 points, or 4.62 percent, to 7,888.88. Likewise in the much broader market,the Standard & Poor’s 500 index fell 42.73 points, or 4.91 percent, to 827.16. The NASDAQ composite fell 66.83 points, or 4.20 percent, to 1,524.73.

This is the biggest decline since Obama’s inauguration on January 20th. Quite a response to someone who has been hailed as “The One,” the messiah who can return normalcy to our financial markets as well as right previous social wrongs and his minion, Treasury Secretary Geithner.

Wait and See?

Truth be told, Paulson, Geithner and Bernanke do not have a plan – other than to try a little of this and a little of that – buying enough time so that the recession naturally corrects as it has historically and enough time for the financial institutions to further camouflage their balance sheets. 

For those readers who desire to read Treasury Secretary Geithner’s prepared remarks at today’s hearing before the Senate Banking Committee, they can be found here.

For those readers who want to really find out what Treasury Secretary Geithner is up to, you might want to click below.

I am sorry I can’t be of any further help as my crystal ball seems somewhat cloudy.

What I do know is:

The first step in resolving this financial meltdown is to institute “safe and sane” accounting rules. Eliminating “off balance sheet” accounts and suspending or eliminating the “mark-to-market” requirement which has decimated the balance sheets of financial institutions.

The second step is to develop a methodology for handling toxic derivatives, be they held by individual financial institutions or be acquired by a so-called “bad bank.” By building a program to re-aggregate some of these assets, fire sale pricing might be side-stepped.

The third step is to develop rules and regulations for the creation and marketing of derivatives – the fruit of the poisonous tree which caused our fall from grace. Whether or not derivatives should be capped at two-generations, much like a multi-level sales program, will be up to the regulators.

The fourth step is to develop a marketplace to register and wind-down all of the credit default swaps which used as bogus insurance. Perhaps by cancelling all contracts in which the purchaser did not own the assets being covered. This estimated $55 TRILLION exposure must be eradicated before one has faith in an insurers, or anyone else’s balance sheet.

But this is all conditioned on stopping the downward spiral of the housing market. Without some form of price stabilization, mortgage-backed securities and other assets will continue to have “wonky” valuations that are more a product of computer schemes and the presence of a willing counterparty than a tangible and reliable value.

As for people who have lost their house to foreclosure or are about to lose their house in foreclosure, might I suggest that we simply apply sound underwriting standards which presuppose that one can muster the necessary cash flow to service their debt. In this instance, a cash flow equivalent to the amount of money that would be required to rent a property of equivalent value in today’s market. For those who purchased property far beyond their means, I am sorry. For those who tricked them into buying, be it the real estate agent who cited rising values, the appraiser who fudged the numbers, the loan officer who falsified data, or the borrower who simply misstated their credit capacity – you have a one-time “get out of jail free” card if you simply walk away from the property and relinquish all claims. Otherwise, let the chips fall where they may.

As for Treasury Secretary Geithner, we wish him well as we do Federal Chairman Bernanke. As for Obama, we wish him to fail before any more disastrous policies are initiated and the American Dream turns into a survivalist nightmare.

Be well and be safe.

-- steve

A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…

The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius