Today, Treasury Secretary Timothy Geithner introduced the Financial Stability Plan. Our comments below:
The main features are the creation of:
a. the Financial Stability Trust
b. the Public-Private Investment Fund
c. the Consumer Lending Initiative
d. the Foreclosure Prevention Plan
e. the Small Business Lending Initiative
The Financial Stability Trust is a "Capital Pool" designed to serve as a buffer to help absorb losses. (Funny, we proposed the same thing for community banks in an application we submitted to Treasury for New Markets Tax Credits. We were not, however, funded. Looks like we need to be, well, non-minority..and to have caused massive damage to the global economy in a thoroughly unethical way. But I digress..) This is a rebranding/repackaging of the current Capital Purchase Program (CPP). In fact, all bank investments made over the past few months will be held in the "Trust".
As part of this "Pool", banks over $100 billion will have to undergo a "Stress test". The good news: banking regulators will finally work together to carry out the "test". The bad news: the statistical models used to conduct these tests are biased and flawed. They did not, after all, prevent the crisis from occurring...
Public-Private Investment Fund. A fund to get private equity investors to take "bad" assets off the books of banks. Good news: well, none, really. Bad news: relies on the same broken private market mechanisms and entities (brokers and investment banks) that caused the problem. Public and private pension funds will be encouraged to participate...as if they haven't lost enough money already. Spreads the damage even wider. (Like opening the doors to Chernobyl.)
Consumer Lending Initiative. Repackaging/rebranding of a previously announced Fed initiative. Will now include Commercial Real Estate. Limits purchases to AAA securities. Good news: brings a previously announced initiative under this comprehensive umbrella. Bad news - relies on flawed and unethical rating agencies, extends into commercial real estate at exactly the wrong time.
All in all, we like this plan. Another reason to be hopeful.
We said in 2003, "Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning." Unfortunately, we were right. And now, while the plan does not deal with the most critical issue, it is a very good first step: it builds on what was done recently and adds resources and rationality. The plan also restricts banks from paying dividends, repurchasing shares and buying other banks with the money. (Now, if we could only restrict entertainment expenses, we'd be all set...)
The main features are the creation of:
a. the Financial Stability Trust
b. the Public-Private Investment Fund
c. the Consumer Lending Initiative
d. the Foreclosure Prevention Plan
e. the Small Business Lending Initiative
The Financial Stability Trust is a "Capital Pool" designed to serve as a buffer to help absorb losses. (Funny, we proposed the same thing for community banks in an application we submitted to Treasury for New Markets Tax Credits. We were not, however, funded. Looks like we need to be, well, non-minority..and to have caused massive damage to the global economy in a thoroughly unethical way. But I digress..) This is a rebranding/repackaging of the current Capital Purchase Program (CPP). In fact, all bank investments made over the past few months will be held in the "Trust".
As part of this "Pool", banks over $100 billion will have to undergo a "Stress test". The good news: banking regulators will finally work together to carry out the "test". The bad news: the statistical models used to conduct these tests are biased and flawed. They did not, after all, prevent the crisis from occurring...
Public-Private Investment Fund. A fund to get private equity investors to take "bad" assets off the books of banks. Good news: well, none, really. Bad news: relies on the same broken private market mechanisms and entities (brokers and investment banks) that caused the problem. Public and private pension funds will be encouraged to participate...as if they haven't lost enough money already. Spreads the damage even wider. (Like opening the doors to Chernobyl.)
Consumer Lending Initiative. Repackaging/rebranding of a previously announced Fed initiative. Will now include Commercial Real Estate. Limits purchases to AAA securities. Good news: brings a previously announced initiative under this comprehensive umbrella. Bad news - relies on flawed and unethical rating agencies, extends into commercial real estate at exactly the wrong time.
All in all, we like this plan. Another reason to be hopeful.
We said in 2003, "Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning." Unfortunately, we were right. And now, while the plan does not deal with the most critical issue, it is a very good first step: it builds on what was done recently and adds resources and rationality. The plan also restricts banks from paying dividends, repurchasing shares and buying other banks with the money. (Now, if we could only restrict entertainment expenses, we'd be all set...)