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Fallout: The Financial Crisis

Weekly Wrap: A look at Geithner’s plans

Marketplace Staff Mar 27, 2009
Fallout: The Financial Crisis

Weekly Wrap: A look at Geithner’s plans

Marketplace Staff Mar 27, 2009


KAI RYSSDAL: An optimist would say we turned a corner this week. The Treasury Department finally shared its plans to save the financial industry and write new regulations for it. There were some economic reports that were more good than bad. And the stock market had a nice bounce. Here to help us do the Weekly Wrap of Wall Street and beyond — emphasis on beyond this week — are Leigh Gallagher from Fortune Magazine and Felix Salmon. He blogs for portfolio.com. Good to talk to you guys again.

Felix Salmon: Great to talk to you.

Leigh Gallagher: Great to be here, Kai.

RYSSDAL: Alright, Felix, you go first this week. Fixing the banks: Secretary Geithner’s plan out on Tuesday. Yes or no?

Salmon: No.

RYSSDAL: Alright, thank you very much. Leigh?

Salmon: There you go.

Gallagher: Well, I would say, I mean, it’s a plan. It was obviously well received. You could argue a little bit with maybe over-exuberance, that the reaction in the stock market on Monday when the news came out surprised I think me and a lot of people. But, you know, it’s a plan. The banks need to burn down these losses. This is an idea for doing that.

RYSSDAL: What I hear you saying is, better than nothing.

Gallagher: Yes, but there’s a lot that needs to happen for this to work. Investors are getting a fabulous deal here; the government’s putting up most of the risk. But, we don’t know A: If the investors that do ultimately come forward and make these purchases, if that’s going to be enough. The banks not only have to get rid of these bad assets, but they have to have enough of a capital cushion to prevent absorbed future losses. And then you’re really asking private investors to be a partner with the government, and there may be some resistance to that.

RYSSDAL: Right, right.

Gallagher: So, you know, there’s some risk.

RYSSDAL: That’s a whole lot of “I don’t knows.” Felix, here’s your chance to expand on your earlier response.

Salmon: There’s vastly more “I don’t knows” than that. I mean, for one thing, no one has a clue what any of these things are worth. No one has a clue how the — especially the big four banks — are going to A: be persuaded to participate in this and actually sell their toxic assets, while at the same time, B: making sure that they don’t cooperate with each other and game the system. There’s so many things which can go spectacularly wrong with this it’s quite astonishing. Yet it is actually, believe it or not, better than nothing. And it could well be the only thing which was politically feasible in this.

RYSSDAL: Yeah, I guess that’s my point. I mean, for all the “I don’t knows” and nobody has a clue, people have been screaming for him to do something and here he did something, right?

Gallagher: Absolutely.

Salmon: Well, people have been expecting him to do something ever since he came out a couple of months ago and said “I’m going to do something.” And people were just waiting to see what on earth it was. Once you announce that you’re going to do something, you have to do something. And this is something.

RYSSDAL: Same guy, different topic. Leigh, the bank regulation plan that came out yesterday, again Geithner doing something?

Gallagher: Absolutely. And, you know, I think there’s widespread agreement by everybody that more regulation is needed and that more regulation is going to happen. He gave some details. Some people questioned the timing; why talk about this right now when we’re still in the middle of a crisis? You could also argue that now is the time to bring all this up because people are desperately aware that we really need to do something and maybe they’ll be more support.

RYSSDAL: Felix, what do you think? Is it doable, what he’s proposing?

Salmon: Yes. I think if it’s ever going to be doable it’s doable now. And what he’s doing in the first instance is just setting up a new super regulator, which is probably going to be the Federal Reserve, which is going to look at the entire financial system and rather than like the SEC — just try and check the box to see whether people are obeying the law and as long as it’s legal you can go away and do as much as you like — it’s really going to look much more critically at companies like General Electric or AIG and say are you posing a systemic risk and if you are, then we’re going to regulate you very tightly. I think that’s a great idea.

RYSSDAL: Alright. So let’s go from the substantive to the moderately less substantive. Has Tim Geithner saved his job in the past week?

Salmon: Yes, he has. Amazingly. And that is entirely thanks to the stock market, which happened to go up that day rather than down. If the stock market had gone down that day then he would be in a very, very precarious position. And it’s ridiculous that he’s at the mercy of something as stupidly volatile as the stock market, but that’s unfortunately the case.

RYSSDAL: Yeah. Leigh, what do you think?

Gallagher: I don’t think his job was as in jeopardy as others might have thought. I mean, Obama came out loud and clear and said no, absolutely not, I’m behind him, if he offered his resignation, I would not take it. But I definitely think he improved his public image enormously this week. Now he still has a long way to go. A lot of stuff still has to happen both in terms of the stress test that we’re going to put on these banks and then to see whether the public-private partnership works.

RYSSDAL: Leigh Gallagher, at Fortune Magazine. Felix Salmon blogs at Portfolio.com. Thanks guys.

Gallagher: Thank you, Kai.

Salmon: Thanks, Kai.

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