Geithner Channels ‘Til Tuesday for TARP Redux
The Wall Street Journal has this informed report on the status of Treasury Secretary Timothy Geithner’s plan for the back half of the $700 billion financial rescue package that became law last fall.
The effort to restore confidence to the financial system comprises a broad range of tools and government agencies. It includes fresh cash injections into banks; new programs to help possibly 2.5 million struggling homeowners; a significant expansion of a Federal Reserve program designed to jump-start consumer lending; and, lastly, the mechanism to allow banks to get rid of bad assets.
The administration’s plans have evolved over the past several weeks as it has considered and discarded a host of ideas, with financial markets anxiously awaiting details. Mr. Geithner had planned an announcement Monday but delayed it a day to allow the focus to remain on the stimulus bill in Congress.
The aggregator bank, which some refer to as a “bad bank,” would be designed to solve a fundamental challenge: How can banks purge themselves of their bad bets without worsening their weakened condition?
The entity would be seeded with funds from the $700 billion financial-sector bailout fund, but the idea is that most financing would come from the private sector.
Central to the questions around the structure of any new plan is what any of it is worth. Whoever invented notion of attaching the word “toxic” to assets in the system has to be feeling guilty these days.
Business Week’s Theo Francis does his best to help us understand how toxic and toxic can be as different as apples and oranges.
Attracting private investors is likely to demand government guarantees against at least some losses on the assets to draw sufficient private investment.
And in the end, setting a price on those guarantees is very much the same as figuring out the value of the underlying assets.
That central challenge is little changed since two prior efforts to resolve the toxic-asset problem. Pay too much, and banks get a subsidy at taxpayers’ expense; pay too little and banks won’t want to sell – or will do so anyway, and wind up so poorly capitalized they fail or require more government assistance.
Toxic, as in, it can kill you, is very different than toxic, as in it can make you very rich if you put your money in and can handle the risk.
Nothing’s simple any more.
Hip Hop-onomics
Bailout Rap is a ”rapumentary addressing the Wall Street bailout, the sequel to the subprime mortgage blues also found on youtube.” Words written and performed by 47 year old stockbroker Gregg Somerville, music composed, performed, and produced by Christopher Conti. Video taken by Mowgli Frere. Video produced by Gregg Somerville and Christopher Conti .
Bailout rap
Trust Us
There’s $350 billion left of TARP money to stretch across a financial system that weakens with each passing day.
But a handful of those who have government watchdog on their resumes are barking, growling, and champing at the bit about the way the U.S. Treasury has dispensed with the first $350 billion. Between the end of October and now, Treasury has got 150 banks to feed at the TARP trough to the tune of about $244 billion, but the watchdogs are crying foul over the fact that the money’s going out with no assurances that it’s going to be put to its proper or intended use.
Kind of reminds one of the $700 billion “blank check” lament that arose as Treasury Secretary Henry Paulson first surfaced the dramatic rescue notion in late September.
Neel Kashkari
Seems Treasury’s best response to the complaint is a simple, “Trust us.” The Wall Street Journal reports that Assistant Treasury Secretary Neel Kashkari jumped to the defense of the TARP implementation to date:
He said Treasury has made “significant progress” toward stabilizing financial markets and is committed to a transparent process.
“But we don’t have the luxury of first building the operation, then designing our programs and then executing them,” Mr. Kashkari said. “Given the severity of the financial crisis, we must build the Office of Financial Stability, design our programs, and execute them — all at the same time.”
Now that the money’s well into the pipeline and scarcely recoverable, hindsight–which reveals that the multi-billion-dollar injections are not putting a dent in the foreclosure tsunami that is swamping the housing economy–is most assuredly 20-20.
Does anybody remember what the “word of the year” was last year, according to the American Dialect Society? It was “subprime.” The same august group is currently accepting nominiations for its 19th Annual word of the year, and you can do something about it. Already, as Barry Ritholtz has reported in The Big Picture blog, the folks at Merriam-Webster have selected “bailout” as their word of the year for 2008.
In light of the saga of TARP woes, we might nominate “hoarding,” as the word of the year. Hoarding reflects the paroxysm of fear that causes people, banks, companies, and governments to stash their cash in their proverbial mattresses rather than to send it back into the arterial network of the economy.
This business of deleveraging an economy is scary stuff. It appears that since 95% of the recommended actions to take should have been taken three to five years ago, our choices now relate to whether it’s our children or our grandchildren that will bear the brunt of our collective recklessness.
As long as there are government watchdogs on the case, however, we may all rest assured that our interests as taxpayers are getting their mightiest defense.
Check it
Treasury Dept. fatigue has set in. It’s like Treasury Secretary Henry Paulson’s blogging his every thought about what to do next about the global economic meltdown, and the world gets to comment every notion to death, and this is the way things work now. Before Nancy Pelosi or Barney Frank or Christopher Dodd get to so much as weigh in on the latest multi-hundred billion dollar let’s-see-if-this-one-sticks idea, Paulson’s got three trillion one-man or one-woman think tanks telling him where he’s got it all wrong.
Anyway, the program being floated now is almost as if home builders’ Fix Housing First ringleaders picked up the red hotline to the Treasury Secretary’s desk and laid on the message. Here’s the way The Wall Street Journal reports on a Treasury plan to get government sponsored entitites Fannie Mae and Freddie Mac to lower interest rates to make it easer to buy and/or refinance homes.
The plan remains in the discussion phase and may not be made final before the Bush administration’s term ends in January. President-elect Barack Obama has said repeatedly that his administration would do more than the current one to help struggling homeowners but he has not offered specifics about what he would do.
Treasury views this plan as potentially halting the slide in home prices by enabling borrowers to afford bigger mortgages, thus increasing demand for homes and pushing up home values. The lower interest rate would be available only to borrowers who are buying a home, not those refinancing a mortgage.
In addition, borrowers would have to qualify for a mortgage guaranteed by Fannie, Freddie or the Federal Housing Administration. Those guarantees apply to loans where borrowers can document their income and afford their monthly mortgage payments, steering the government away from backing loans considered risky.
Treasury and the Federal Reserve are already working to bring mortgage rates down through a program announced last week in which the Fed will purchase up to $600 billion of debt issued or backed by Fannie and Freddie, along with Ginnie Mae and the Federal Home Loan Banks. That move helped push down rates on 30-year mortgages, and applications to refinance have jumped by a record amount, the Mortgage Bankers Association reported Wednesday.
In this climate, stocks of banks and home builders drew more investor attention Wednesday, helping the Dow Jones Industrial Average rise 172.60 points, or 2.05%, to 8591.69, despite continued bleak economic news in the Federal Reserve’s “beige book” survey of regional conditions.
Under the plan the Treasury is considering, it would encourage banks to issue new mortgage loans at lower rates by offering to purchase securities underpinning the loans at a price equivalent to the 4.5% rate.
The Treasury would fund the purchases by issuing Treasury debt at 3%, suggesting the government could make a profit on the difference.
Of course, pundits wonder just how much the lame-duck Paulson has departed his senses as he proffers these plans.
I’m curious. You’re not necessarily Barry Ritholtz’s audience. Where do you stand in this debate?
Timothy Time
Friday’s bear rally came in the nick of time to rescue a pre-Thanksgiving holiday weekend from painkillers and paranoia.
Geithner for Treasury
The Barack Obama plan–change from what’s just been back to a little more of what was [under Bill]–is taking shape decisively. With Timothy Geithner, Treasury will be able to play offense in a cross-the-aisle way necessary to build both consensus and conviction. The New York Times reports:
Mr. Geithner, 47, for weeks has been the subject of speculation for the administration’s top economic post, a job that has gained out-sized stature as the economy has weakened and the Treasury secretary has been put in charge of a $700 billion financial bailout program. His chief rival was his former boss at Treasury, Lawrence H. Summers, President Bill Clinton’s final Treasury secretary.
Check in tomorrow for a look at a “whew” moments from the past week worth reviewing.
A TARP-athon Moment of Truth
The CEOs of Detroit’s Big Three auto companies will daub on their war paint for another day defending their lives as debate over whether and when the Treasury Department coffers may open with billions in taxpayers’ rescue dollars. For residential construction companies who seek a huge consumer stimulus package whose direct consequence would come as a positive jolt for their interests, they get to see what works and what doesn’t fly with Congress and the agencies by looking at the car companies’ example.
A question that arises is whether the story, covered in today’s Wall Street Journal, “Big Three Plea for Aid,” is more one of collateral damage or collateral opportunity. After the media blitz and blare of the past week or 10 days, there can hardly be a soul alive who doesn’t now know that one in 10 U.S. jobs owes itself to the manufacture and sale of cars. The fact that so many Congressional seats come up for reelection every two years makes it highly likely that a lifeline will be extended.
Which brings us to the collateral opportunity part of the equation.
Will the tactics General Motors, Ford, and Chrysler are using to lobby Congress for help translate? Which of them will home builders’ and their compadres in the Fix Housing First alliance appropriate for use in trying to get equal time and consideration from House and Senate committee leaders and their associates?
CNBC’s Diana Olick clocks in with a post with her view–skeptical–of where housing might fit in the ever lengthening queue of bidders for a portion of TARP bounty.
Big Builder '08 CEO Panel
I’m all about the hope, but I’m also all about talking to the builders, and I don’t see a whole lot of hope there. On Election Day I moderated a panel of three builder CEOs and the Big Builder ’08 Conference. Two were CEOs of public companies, one private. None of them had anything particularly hope-inspiring to say, and all of them spent the bulk of the time pushing their agenda for a bailout. I don’t blame them, seeing as buyer confidence is lower than ever and home prices have yet to hit the water.
New construction represents far less than a quarter of the total number of homes currently for sale, so I guess a bailout for builders will have to come second to a bailout for the overall housing market. But as I sit here watching a hearing about a big bailout for the automakers, I wonder if the home builders aren’t just waiting in the wings.
The Model is Broken
To which industry does the following set of eight statements apply?
- This sector represents material impact to the U.S. economy.
- This sector directly and indirectly employs a significant percentage of the U.S. workforce.
- This sector is choking with legacy costs in salaries and pensions, outdated industrial processes, and chronic supply chain inefficiency.
- This sector represents dramatic overcapacity versus foreseeable levels of demand.
- This sector produces and markets products/services that are out of synch with consumer preferences and emerging trends.
- This sector requires dramatic transformational restructuring–in management, strategy, and operations–for it to emerge into the next decade a relevant, sustainable business meeting an evolving consumer marketplace’s needs.
- This sector is saddled with debt of its own making and design, and is reaching insolvency, and is urgently in need of cash to continue operations and meet debt obligations.
- This sector seeks billions of dollars in immediate U.S. taxpayer relief as life-support as the U.S. Treasury tries to determine which distressed assets to buy under its all-but-used-up $350 billion TARP Phase 1 program. The next $350 billion is already spent–virtually–as well.
If you guessed financial services, well then, you’re right. Or automotive. Or housing. Or perhaps even retail.
Squawkovia Bank?
The only-somewhat facetious banter during this morning’s Squawk Box program on CNBC is that analysts Joe Kernan, Becky Quick, and Carl Quintanilla would together apply for designation by the Treasury Department as a “bank holding company,” just as American Express Corp. did on Monday. That way, they could go up to the Fed window and get a whole lot of money, just as American Express is doing today.
The difficulty of the moment for those who own and manage companies that normally make a living in the housing and residential real estate sphere is that housing is two worlds in the minds of those making the big decisions on Capitol Hill these days. Housing is people needing safe, hygienic, connected shelter from the elements. And housing is moguls who make millions during real estate run-ups. Household balance sheets may be the engine of the economy; the personal wealth of real estate moguls is the engine of their own gains in personal wealth.
The medicine people on Wall Street, Main Street, and Constitution Avenue have to take is painful beyond words. Almost to a person–save a few souls like Yale professor Robert Shiller, and New York University professor Nouriel Roubini, and a handful of other Cassandras–we believed our own hype. We believed what we have and what we are implicitly gains more value in our possession and in our being. This theory is central to the work of behavioral economist Dan Ariely, who spoke at Hanley Wood’s Big Builder ’08 conference last week in Washington, D.C.
As we traverse a deflationary winding path, we each face having to re-value not just assets we select to re-value, but everything. This is tough. Many of us Baby Boomers counted heavily on paper profits in real estate to cover over a hosts of missteps and profligacy from our earlier careers. Now, we can at best hope to extend our careers long enough on the tail end to earn our way back to wholeness over the next decade.
Conclusion: any and all taxpayer relief should have not just strings but rope attached. If an industry takes the money simply to parry on with strategies that were failing long before the economy hit its current wall, then shame on us taxpayers for permitting our government to spend good money after bad.
Rescue Logic
The question of the moment: Who to save and from what?
This week, we’ve had hardly needed confirmation that the economy’s in recession, consumer confidence is at an all-time low, housing prices are still plummeting, and rescue and stimulus plans are proliferating. Volatility is so engrained now in equity and commodities markets that keeping track of where everything is has become “like watching a National Basketball Association game,” says one housing and financial services industry observer. “It doesn’t matter what happens for most of the four quarters,” he says. “The part you have to see always happens in the last two minutes. It’s getting that way with the stock market.”
In the 11th Hour, as U.S. Treasury Secretary Henry Paulson begins to map a transition plan for over $1 trillion in rescue monies the U.S. will borrow vs. the $52 trillion in total U.S. wealth and as voters take their final moment to consider who to put into the Oval Office for the next four years, an issue at the crux of trying to prioritize focus is as simple as this: The American Dream. The global economy’s listing now relates more to those who have in the past five years joined the ranks of America’s 76-million-plus homeowers than many of us would like to admit.
There are hugely significant decisions and initiatives to make around what can and should be done about growing numbers of housing units in financial distress, and the real families dwelling in many of them. Here’s two critical facts to remember as healthy debate about plans takes place. One is that of almost 130 million households and 76 million-plus homeowners, one in three of the homeowner group does not even have a mortgage (51 million homeowners do have a mortgage, according to U.S. Census 2007 American Community Survey data). The other is that an all-time high of 14% of housing units are counted as vacant. That’s 7 empty places for every 100 housing units. It’s a lot of those places that are among the 10 million “homes” apparently underwater on mortage loans, and among the 3 million “homes” counted as either in or headed for foreclosure.
It’s important to realize this because a goodly number of so-called homeowners in distress are actually investors who bought and don’t live in their now-vacant housing units. So we should not imagine a family put out on the street for each and every one of the homebuyers in trouble on their distressed deeds. New Strategist editorial director Cheryl Russell analyzes the data to try to pry apart myth and reality in looking at the mortgage mess.
- A Wall Street Journal analysis sums up the latest GDP reading, and the political traction news of a deep downturn may offer the respective presidential campaigns leading into Tuesday’s election.
- CNBC reports on consumer spending declines in September 2008, the first in two years.
- Barry Ritholtz’s “The Big Picture” takes on the issue of moral hazard amid the dueling homeowner rescue packages circulating in and around The Hill.
- Builder editor Boyce Thompson reports on efforts among leading home building companies to get the new home construction industry’s interests–a sizeable tax credit and a mortgage buy-down–reflected in rescue and stimulus packages that get consideration in Congress.
In fact, a question that may need to be asked and answered is how much the increase in homeownership rates from 63% or 64% in the mid-1990s to almost 70% in 2005 is worth. Expanding the sphere of American Dream was going to have its price as well as its value. How do we look in a realistic way at the risks and liabilities involved as well as the benefits and opportunities of bringing America’s homeownership rate closer to many nations of the world?
A necessary vantage point on this issue for all those in residential real estate and construction is one Multifamily Executive editor Shabnam Mogharabi raises in her essay, “Which One are You?,” about the need to count people in rented homes as equally critical parts of housing’s equation.
Her assertion?
Unfortunately, renting gets a bad rap—one that it doesn’t deserve. In an age where high density and anti-sprawl are the drivers, proximity to transit and walkability the amenities, and sustainability the ultimate goal, the multifamily industry has a responsibility to educate consumers about the benefits of renting in live/work/play hubs throughout the country. Homeownership may be the fastest way to wealth creation for many families in the country, but homeownership is not for everyone.
Among the most important factors in how the correction will ultimately sort out may not be who’s model works best in a spreadsheet. Human behavior and psychology weigh too heavily in the balance for even the most excellent econometric solution to fully apply. The important thing is to make a plan that will keep its head as the 800-pound gorilla of misplaced trust tosses its weight around in the middle of things.
People want their homes, and the logic of building trillions of dollars of global business upon the premise that the loss of one’s home would be too devastating for people to let that occur is showing its flaws in all their glory. Too many variables came into play with that bet.
What people also want now is not so tangible as a home, its safety, security, and protectiveness. They want revenge and they want justice, big motivators in who’ll support which rescue plan in the last two minutes of the game.
Props and Sources:
The Wall Street Journal, Data Stoke Campaign Battle Over Economy, October 31, 2008, http://online.wsj.com/article/SB122536898235884019.html?mod=testMod
CNBC, Consumers Cut Spending For First Time in Two Years, October 31, 2008, http://www.cnbc.com/id/27470443
The Big Picture, Barry Ritholtz, Moral Hazard of the Coming Mortgage Bailout, October 31, 2008, http://bigpicture.typepad.com/comments/2008/10/moral-hazard-of.html
American Consumers Newsletter, Cheryl Russel, October 14, 2008, Hot Trends: DON’T BLAME MAIN STREET http://www.newstrategist.com/store/index.cfm/feature/35_15/dont-blame-main-street.cfm
Multifamily Executive, Shabnam Mogharabi, Which One are You?, October 1, 2008, http://www.multifamilyexecutive.com/industry-news.asp?sectionID=537&articleID=782831&refresh=true
Image source: Bloke’s Blog, What Do you Call an 800 Lb. Gorilla? http://www.strategicmarketingmontreal.ca/otherbb/2005/09/what-do-you-call-800-lb-gorilla.html
Takes from the Trenches
What goes up....
What a wild ride! Just about 4 pm, and the stock market’s final convulsion jolted back upward above the 10,000 mark… and then back down to 9,955. So much for rhetoric that The Newer Deal would calm roiled investors, domestically and in other sovereign lands. Now that you’ve at least begun to stop hyperventilating, take a tip from one of our sources ensconced somewhere squarely between the bid and the ask of land assets. “I started to find myself getting really depressed about all that was going on last week,” he says. “But then I realized there’s nothing I can do about a lot of that, and there was still my job to do, and my family. So, at least I can tuck in and concentrate without getting so distracted about the volatility.”
Good advice. Turn down the static, and keep the to-do list full.
Around and about the stable, correspondents have been trying to keep perspective on the practical side of the spectrum … as in what to expect so that you can decide for yourself what to do.
Housingfinance.com senior editor Jerry Ascierto reports on just such expectations-setting. He fields high-level perspective on hopes that in the aftermath of the passage of the rescue bill, eased liquidity and solvency anxieties would act as an acetylene torch to frozen credit markets. Alas, not so fast.
Indeed, the Treasury Department’s massive undertaking won’t immediately jump-start the stalled debt markets for commercial real estate, many industry watchers agreed. “We hope this will unfreeze the lending pipeline within a reasonable time frame, but it isn’t going to happen overnight,” said Doug Bibby, president of the National Multi Housing Council (NMHC).
One wonders when–between “overnight” and never–one could actually hope to obtain normal working capital at a modicum of a reasonable price. That might be a while.
Another angle of expectations-setting has to do with the actual aim of the $700 billion EESA/TARP. What’s been at issue in a big way in free-market land for months is the “opaque-ness” of the assets. Knowing whether the assets’ toxicity level is of a kill-you-in-30-seconds variety or a knock-you-down-and-out for a few days ilk might be considered material to assumptions on valuation. The free-markets never got to work through the opacity to get the poison identified and valued, but the government’s step-in precludes that process.
Which opens the plan up for potshots from all angles.
So far, the latest series of government intervention initiatives has gotten very poor grades from at least one set of supposed beneficiaries–the home builders. BIG BUILDER executive editor Sarah Yaussi rolls up insight that lets you know why and whereof the $700 billion figure in the first place, and a piece of the minds of home building executives who’d rather see the Treasury do things to stop foreclosures as a way of stemming the hemmorhage in home prices.
- What happened to home builder stocks today? Big Builder’s Bill Gloede reports.
- Builder stocks were caught in the downdraft but recovered by market close, with losses ranging from a 16.9% drop in Hovnanian shares (NYSE:HOV) to $6.23 and to a 2.5% drop in best-in-class NVR to $560.01. Between 2 and 3 p.m., a half dozen builder stocks were down by double-digit percentages before rebounding.
Still, home builders and others in the residential construction and remodling space should note that some of the billions may head their way if their way is green. Ecohome‘s editorial director Jean Dimeo reports on the $18 billion in renewable energy tax credits that it turns out were renewable in deed as well as on paper.
Meanwhile:
- The battle for rights to Wachovia goes into tense truce mode, with billions in the balance;
- If you’re wondering why the Fed has started paying interest on reserves with its new powers, check this out.
- Levity, even now, is critical. Have a look at SNL’s coverage of housing and financial sytem history in the making. Scroll to C-Span Bailout.
Now, back to work, and try to be less distracted by all these financial district shenanigans tomorrow.
Morning After Musings
Edward C. Forst
Business Week‘s Jane Sasseen writes, “Now comes the hard part: getting the Mother of all Buyout Funds up and running.”
Treasury officials have made clear they want to do that as soon as possible, and have told congressional leaders and Wall Street executives that they will conduct the first auction to buy assets within four weeks. The work needed to accomplish that is well under way, by a team of Treasury officials led by Ed Forst, a Goldman Sachs (GS) alumnus who left the firm this summer to become a senior administrator at Harvard University. In late September, Paulson asked him to come to Treasury to work on the bailout program. Forst, who is on a temporary contract, began to outline the plans for implementation even as Congress wrangled over the details. With the deal now done, Treasury hopes to hire five to 10 asset managers to oversee the purchases, each of whom will manage up to $50 billion in assets. It also hopes to hire another couple of dozen bankers, lawyers, and accountants needed to run the program, with much of the hiring expected within the month.
Lest one let expectations become overly rosy, we don’t enjoy the luxury of getting to hit a “Pause” button on global economic and credit conditions while the immense human labor, business modeling, and executional program that aims to absorb compromised financial assets into a kind of mega-monetary liver for cleansing, repackaging, and recycling into the system gets placed into action.
So, as CNBC briefs us, get ready for a rough ride ahead. The data shows several European economies–ones that have been helping prop up U.S. exports and our GDP–are now in recession, and many economists expect U.S. numbers to confirm what many of us have been sensing for months.
Where is it all heading? As much as we’d like to believe the new rescue package will inject a dose of psychological adrenaline into a stalling financial complex, we’ve still got to do the best we can to understand the sickness as well as to keep looking at what the antidotes are intended to do. For understanding, this morning, turn to crystal clear insight from the Op-Ed pages of the Washington Post, where commentator James Grant demystifies the consequences of the direction we’ve headed in.
The unblinkable fact is that Americans own too much house. We overpaid and overborrowed, and many of us are “upside down,” as the car dealers say. What to do? Recognize the losses and write them off. What not to do? Inflate the currency and debase accounting standards.
But inflation and debasement are the very policies being put in place. The Federal Reserve, not waiting for Congress, embarked last month on a radical program of money-printing. Reserve Bank credit — the raw material of bank lending — is growing at the year-over-year rate of 61 percent.
Credit creation is the Fed’s signature crisis-management policy: Let a bubble inflate, then watch it burst; clean up with lots of dollar bills. After the stock market broke in 2000, then-Fed Chairman Alan Greenspan set about easing policy. In company with Fed Governor Ben S. Bernanke, the man who wound up succeeding him, Greenspan warned against “deflation.” He vowed that this country would not sleepwalk through a decade of falling prices, as Japan had done. Rather, the Fed would push interest rates low enough to jolt the U.S. economy back into prosperity.
Clearly, even adding all the weekend days left until the Nov. 4th Presidential election, U.S. Treasury Secretary Henry Paulson’s got just about four weeks left to exert his force [and his Forst] of will. It’s time, among other things to start looking at the teams of economic advisors the two candidates have called on, to begin assessing whether they have the right horses in the stable to get this incredibly big job done.