What an awesome plan!

Well the latest plan from Treasury Secretary Timothy Geithner did not impress the markets today. I think the plan put forth was in fact not a plan at all. The primary reason for the sell off (beyond the resistance at the 50 day moving average) was that the market could see that they have no plan to "fix" things. It actually seems odd that they bothered having a news conference at all, given the lack of details. Maybe they figured they better just say something since they have been alluding to a new plan for sometime. Just as Obama is pushing for the stimulus with the argument "we need to do something?" , he must have forced the treasury to just do something as well.



Unfortunately the problem of bad assets is not easily solved. The ideas put forth look very similar to the original TARP plan which was abandoned. The problem is simple. If you buy the banks bad assets what do you pay? If you pay too much you have little effect as you cannot buy very much bad paper and you are sure to incur large losses for taxpayers. If you pay too little the banks need to write down the assets to the price paid which could deplete their capital more and maybe reveal they are insolvent. This is why the "bad bank" ideas will not work as envisioned.



I suppose looking back at the Resolution Trust Corporation method you should be able to help the situation. But the thing is those assets came from banks that were closed, hence the government accepted they were insolvent. The real issue now is that no one wants to admit the banks are insolvent. The reason I'm guessing is because of all the derivatives.



The derivatives essentially link all the banks together so tightly that if one fails, they all fail. These derivatives are very diverse and are not limited to housing. This is one of the fallacies of the view that "if we fix housing everything will be okay." My guess is that many of these derivatives are nothing more than side bets. Think of the movie Caddy Shack where the guys are behind the bushes and betting on if the kid will pick his nose, then eat it.



Now side bets are fine if you have the money to lose, but it is becoming apparent they bet with borrowed money. Even if you win the bet, if the person you bet against can't pay, you lose. So the issue is all these banks made extremely large bets with each other. If anyone of them goes down they take out the others because the losers can't pay. Also it highlights that the banks may not have diversified their bets very well either. If a bank tried to be a little conservative and hedge some big bets, but the guy that took the hedge went out of business, you have no hedge at all. Or if they were arbitraging in some way by betting both sides but getting (in betting parlance) some "juice", if one or both sides can't pay, the surefire can't lose bet is a bust.



The crux is that this is bigger than housing. This is part of a larger speculative debt bubble and it will take more than a few talking heads talking in vague terms to get through this.

--Staff