What to make of Treasury Secretary Tim Geithner’s op-ed today in the Wall Street Journal, and his plan to save the financial system through a Public-Private Investment Program? Rep. Scott Garrett (R, N.J.), one of the few members of the House Banking Committee who really understands the issues involved and asks pertinent questions during hearings, told me that he has a few concerns with it. Among them:
1) Is a $500 billion to $1 trillion plan large enough to restore confidence for investors, when the size of the problem here is greater than $2 trillion? And what if the worldwide problem is several times as large? What impact does the global market for toxic assets have on the ones we’re buying here?
2) Geithner says nothing in his op-ed about the issue of mark-to-market, and whether some kind of measures will be taken when the PPIP purchases mortgage-backed securities to ensure that it does not have a ripple effect. When the purchases are made, will the newly established (and lower) value of such assets suddenly burn huge holes in the balance sheets of institutions that do not or cannot take part in this round of the bailout? “It probably would have been good if he said something in that op-ed about addressing mark-to-market at the same time.”
3) While advocating provisions that prevent abusive use of government bailout money — for huge bonuses, for example — Geithner offers this cautionary note:
These provisions need to be designed and applied in a way that does not deter the participation by the private sector in generally available programs to stabilize the housing markets, jump-start the credit markets, and rid banks of legacy assets.
With Congress acting out of rage and haste (and a desire on Democrats’ part to cover their rear-ends) to pass the 90 percent AIG bonus tax, Garrett wondered whether they might be undermining what Treasury is trying to do, creating a huge disincentive for marginal institutions considering participation in the new bank bailout. (This concern is probably reflected in President Obama’s apparent coolness toward the AIG tax.)
Meanwhile, House Minority Whip Eric Cantor (R, Va.) offers up this statement in opposition, advocating instead the use of the insurance model that some Republicans had offered up as an alternative to TARP:
[T]he plan seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer. In its current form, Secretary Geithner’s plan is a shell game that hides the true cost of the program from the taxpayers that will be asked to pay for it. Six months after Congress debated the first TARP, it is inexcusable that taxpayers still have not been told their true exposure.”