FDIC Release on $1.8B AmTrust Deal with Toll’s Gibraltar and Oaktree May Come Tomorrow
The Federal Deposit Insurance Corp. could announce as soon as tomorrow its auction of a $1.8 billion portfolio of distressed loans under the now-defunct AmTrust Bank to a joint venture of Toll Brothers’ new Gibraltar Capital and Asset Management unit and Los Angeles-based private equity player Oaktree Capital Management, according to an executive familiar with the transaction.
“Normally, the FDIC would have put out an announcement by now, but they’ve been busy with a lot of issues these days,” said this executive, who asked to remain anonymous. “The press release may come as soon as Thursday this week. We think they’re paying about 30-plus cents on the dollar.”
Here’s an excerpt from an FDIC release on the award of another $898 million AmTrust pool of residential mortgages to a consortium of financial players led by Residential Credit Solutions, CarVal, and RBS Financial Products.
AmTrust bank failed on December 4, 2009, and the FDIC immediately entered into a purchase and assumption agreement with New York Community Bank, Westbury, New York, to assume all the deposits and approximately $9 billion of the assets. This transaction completes the sale of the majority of the remaining assets of AmTrust Bank.
- See related story from Big Builder’s Teresa Burney on Toll Brothers’ new Gibraltar unit.
Word is, the AmTrust 280 loan portfolio with an average of $6,000 per loan encompasses 1800 properties, primarily in the Nevada, Arizona, California, Florida, Georgia, and the D.C. Metro/Maryland markets.
The Oaktree-Gibraltar JV’s assumption is that, after combing through the 1800 properties, they–like Lennar’s Rialto–have an opportunity to profit at least three different ways on the financial disposition of the property assets covered under the loans.
- They earn management fees as they move some properties through to foreclosure and an ultimate sale;
- They can selectively sell properties to home builders or developers;
- They can rehab or develop the properties through the Toll Brothers operation and put more value on deals that may have failed sheerly due to lack of adequate capital access.
The Gibraltar-Oaktree JV, just like in the Rialto case, will have to cover its nut with the F.D.I.C. before it can write profits on to its balance sheet and flow them through to Toll Brothers’ Corp.
We hear that Oaktree’s deal with Toll Brothers taps into a different fund than the acquisitions joint venture it had formed last year with Ryland Homes. “Other home builders are not part of this AmTrust/FDIC deal,” according to the executive we spoke to.
Now that Lennar has triggered a financial skill-set it had developed during earlier downturns and Toll Brothers has established a captive unit to play in the distressed paper and hard asset arena, it may be a question as to whether other home builders explore adding such capabilities to their repertoire. This question surfaces especially as conventional home building operations continue to battle lack of visibility and low absorption rates.
No doubt public home building companies will explore all means possible to generate cash and write new profitable business onto their balance sheets, but most are set up with more limited financial resources and expertise than Lennar and Toll, and would have too much to learn too quickly to avail of the opportunities in so sophisticated a financial/legal game.
We’ve head KB Home is taking a look at partnering and that M.D.C. Holdings has had a conversation or two, but most companies will focus short term on opening stores and taking share, primarily from the nine out of 10 home buyers these days who are opting for a resale vs. a new home.
“Problem is, we’re competing with resales that were built in more and more cases in 2005 and 2006, so we have to do better than ever at getting our share,” said the CEO of one of the nation’s leading public home building companies.
FDIC Ya Later
Business considerations notwithstanding, we think it’s less than psychologically healthful that the FDIC gets the last word every week.
Note: The FDIC announced there were 552 bank on the official Problem Bank list at the end of Q3. The difference is a mostly a matter of timing – some enforcement actions haven’t been announced yet, and others may be pending.
Couldn’t we figure out a way to make these bank failure announcements on Monday morning? We realize every announcement means going in with agents and counting hundreds of millions or billions of dollars and figuring out what the bank’s got and what it hasn’t got.
But every Friday afternoon? Sheila, you hear what we’re sayin?
The Fix Housing First Job is Not Done Yet
When Raleigh, N.C.-based St. Lawrence Homes executive Rich Ohmann speaks, we know we have to listen.
Yesterday, it was what Rich made of the media’s take on housing starts, which portrays home builders collectively as a villainous drag on a fragile economic recovery. Here’s Ohmann’s reaction:
I love this story. It blames housing for dragging down the ‘budding economic recovery’. I would submit that the prior turns of homebuilding were fueled by the creation of new homebuilding firms (we were one of them in the mid 1980’s). Today’s languishing condition is only partly due to the condition of the market (no disputing the fact that things are awful in our economy as a whole). I would place the blame for a majority of the lack of vibrancy in homebuilding on the fact that innovators and new business creators aren’t able to secure ANY funding for a venture large or small. (emphasis added by Housing Crisis) A young entrepreneur can’t start up without cash and there’s no credit. The old world entrepreneurs are still trying to figure out what to do with what they were left with when the world came to a screeching halt.
There’s no recovery without a credit source to fuel it. Am I the idiot here or am I just one of many?
You are not alone, Rich.
As you know we’ve been on the road this week. Everywhere everyone in residential real estate–single-family, multi-family, affordable, etc.–wonders to us aloud, “What’s happening out there? What are you hearing?”
What we’re hearing is that there’s no consensus on what’s going on, as much as we crave a pattern, and want to see a trend develop. Where there are bright spots, they’re bright for isolated reasons. The theme and broader backdrop is still hugely challenging, save in part for the public home builders, whose almighty balance sheets will see them through another treacherous stretch of 12 months or more.
- We’re hearing cheery one-offs from home builders such as Irvine, CA-based MBK Homes, that they’re not only sold out on their planned homes through their current fiscal yearend, ending April 1, 2010, they’re also 50% sold out for their coming new year.
- We’re hearing this phrase repeatedly, and in more and more places: “We’re buying finished lots. We have to.”
- We’re hearing that public companies that were doing 1% of their market’s homes on volume of 1,400 homes a year, now have 4% marketshare doing less than a run-rate of 200 units a year. The publics can build; many privates can not given the cost of money to go vertical today.
- We’re hearing that as long as a company has access to ”internal finance,” they can build. If they don’t, they’re SOL, and ergo a “drag on the economy,” as the Associated Press story referenced above would contend.
- We’re hearing that company after company that succumbed to the credit squeeze of 2008 and 2009 has a principal or three who’re locking and loading to reenter the fray as Messrs. NewCo in 2010.
- We’re hearing rumblings that the FDIC has begun operating in similar ways to the Resolution Trust Corporation in the 1990s. When a bank goes into zombie mode, and can’t move on its real estate holdings because doing so would throw its entire capital structure into turmoil, the FDIC now comes in and takes the bank, and begins deploying the commercial real estate for 10 or 20 or 30 cents on the dollar, just like the RTC back in the day. The noteworthy thing is that the FDIC is trying to keep from letting the land go to speculators–rather, it’s trying to place the residential land portfolios with companies who earnestly want to make a longer term go of building communities out.
- We’re hearing that job loss, job loss, job loss is the issue policy and policy-makers need to give their full attention for the next year, or many of them won’t be in office after next year’s mid-term elections.
In Phoenix alone, points out Marcus & Millichap VP for Investments Peter TeKampe, 300,000 people have lost their job since the economic heyday that ended in 2007. In Atlanta, the number is 60,000. Apartment vacancy rates are on the rise. Household formations are stagnating. The structural drivers of the residential investment component of the GDP are challenged.
So, we’ve been wondering for months now, when home builders say, “I’m buying lots,” what’s on the other side of that equation? Are they buying lots to replace lots they’ve sold at full value? Is the scarcity in good finished lots in Phoenix, parts of Southern California, and even in Florida, Atlanta, and the D.C. metro area a scarcity caused by home buyer demand? Think again.
How can it be now, when other than a few exception veins of economic fortitude, earnings and well-being are so uncertain?
Among the biggest questions we face in our time, and we appear to be out of time to evade them, are these:
- How will Americans pay for healthcare?
- How will Americans both a) transition from dependence on non-domestic energy sources, and b) reduce its negative impact on climate and the environment?
- How will Americans segue into a new economy that can create demand for its workers?
Home builders–it is clear from a growing number of economists’ diatribes and media muckraking–are being held up as chicanery-prone, money-hungry beneficiaries of both the up and the down side of the economic parabola.
So, we have a thought, and it springs from what we feel was a highly effective unified effort among home builders in support of the extension/expansion of the home buyer tax credit and the telescoping backward of the NOL tax carry back provisions for larger companies.
We feel that in light of how successful companies were in harmonizing their interests and telling their stories to elected officials, home builders should sustain their momentum, and keep their act together.
The Fix Housing First brand, in other words, could take on a new mission. It could build off its collaborative outreach among home building, real estate, the AARP, and other organizations, to go another step or two to move the economy where it needs to go.
Fresh from the victories achieved on Capitol Hill, we’d suggest the following for Ken Gear and the organization that lobbied so well to sustain the stimulus of housing demand.
- Keep the consortium of builders together to Fix Housing First;
- Focus the educational and policy influence program on housing’s direct impact on jobs
- Get public home builders actively involved with the FDIC’s bank take-over programs to identify workforce housing districts in metro areas nationally
- Bring public and private home building companies together–using some percentage of the public home builders’ accrued cash supply as a guaranty–to capitalize acquisition of land parcels from FDIC banks, set up fee-building opportunities, with municipal workforce needs as a primary driver.
This would be a story that elected officials could both understand and act on.
We’re beginning to come to grips with the fact that the arduous, unbearably flat and grudging recovery ahead of us will continue to take a toll on what we knew as the home building landscape circa 2006. That world is done.
Home building companies need to account for how good and how trustworthy they have been and continue to be. That need goes 24/7. The minute one of them stops that, trust goes by the wayside, and a company is no longer a business.
Right now, home builders have an opportunity to seize on what they gained recently with Congress and the President, and continue the crusade to Fix Housing First, bringing their story to the public. This means staying together as a group, and putting resources and focus toward new economy solutions for one of our nation’s chronic problems–workforce housing.
If the big builders can become part of that solution–and they have the means in both capital and skills to do it–then it will go far toward easing Rich Ohmann’s, and many many others’, anxieties about getting blamed for being both the cause of the catastrophe, the beneficiary of the rescue, and the dampener of sparks of economic momentum.
Saddest Quote du Jour
Only those who are compelled by an old-fashioned sense of obligation might continue making payments.
This is the opinion of the Milken Institute’s director of regional economics Ross DeVol and president and chief executive Michael Klowden, which appeared this past Friday in the Financial Times.
They’ve mapped out a plan that the HUD Secretary Shaun Donovan, FDIC’s Sheila Bair, Treasury Secretary Tim Geithner, and the Fed’s Ben Bernanke should consider in light of the feeblest signs that home buying demand does exist if just a few of the foreclosure headwinds can be muted.
DeVol and Klowden note that the big flaw in Obama’s program to stem foreclosures is not in its mission nor even its structure, but in its math. A 105% LTV ceiling just doesn’t cover enough troubled homeowners, nor does the current program forcefully enough incentivize wavering borrowers to weather the storm and keep repaying.
To fix this conundrum, the Obama administration should add the homeowner principal forgiveness vesting plan to its program. Here’s how it works: After a valuation of the property and proper income and credit verification, two separate loans are made. The first loan, from Fannie Mae, would be for the current value. A second, interest-only loan, from the Treasury Department, would make up the difference between the current home value and the original mortgage.
We wonder how widely shared the two authors’ view is on the following assumptions:
- 6 out of 10 purchases since 2004 are underwater
- Every 100,000 foreclosures prevented translates into .5% on home price stabilization
The big time conclusion:
So, if 1.5m foreclosures were to be avoided, home prices would be 7.5 per cent higher than without the plan.
That’s a lot of wealth destruction avoided, a lot of consumption capacity preserved, a lot of jobs saved.
Still, it’s sad that the sense of obligation to pay back what one borrows is “old-fashioned.” Passe.
Low Ebb Haiku–Bank Failures Mount, FDIC Reachers Deeper
Where economics and housing analytics rise to an artform, on Calculated Risk, he offered this fillip on Friday after learning of the failure of bank #17, Freedom Bank of Georgia, Commerce, Georgia.
Ah, seventeen! The CR Commentariat gets a hold of that number, and naturally, the conversation elevates to this contribution from a reader called “Soylent Green Is People.”
Friday: Freedom failed.
Cost Today: Thirty Six Mil.
Upward Soars Our Tab.
Meanwhile, the Wall Street Journal reports:
Click on image for access to WSJ article.
Legislation, introduced late Thursday by Senate Banking Committee Chairman Christopher Dodd, would temporarily allow the FDIC to borrow $500 billion to replenish the fund it uses to guarantee bank deposits, if the Federal Reserve and Treasury Department concur. Those funds would be distinct from the contentious $700 billion financial-sector bailout, which lawmakers are loathe to expand….The bill was championed by FDIC Chairman Sheila Bair, Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner. In a Feb. 2 letter to Mr. Dodd, Mr. Geithner said he supported a move as it would allow the government to respond to “exigent circumstances.” Mr. Bernanke sent Mr. Dodd a similar letter the same day, suggesting a coordinated effort was at work.One difference between the FDIC’s insurance fund and the TARP is that any money the FDIC borrows from the Treasury would likely have to be repaid through assessments levied on banks rather than on taxpayers. The FDIC finances its fund through bank fees. Many struggling banks argue that the government should ease up on fees until the credit crisis abates.
Now, haiku that.
Bair and Bair Alike
This week CNBC caught up with Federal Deposit Insurance Corp. chairman Sheila Bair. Her to-do list these days locks her in the eye of the financial storm from every which direction–namely, bank stress tests, bank failures, and home foreclosures and the policy aimed at each.
CNBC has broken up its one-on-one interview into three separate segments.
Here’s the segment that focuses on the new Obama program aimed to mitigate home foreclosures.
For greater detail into Sheila Bair’s strategy to fix banks and slow foreclosures, see Big Builder senior editor Lynn Norusis’s “Bair on a Hot Tin Roof” analyisis.
Whistle Stop
Nick Thomas, an investment and financial analyst who contributes to an Oxbury Publishing missive called “Bourbon & Bayonets,” scooped us on this notion as we consider the Stress Tests that will determine which banks should qualify to get Son of TARP money.
This is the notion:
The site Wiktionary defines to “whistle past the graveyard” in two ways:
1. (idiomatic, US) To attempt to stay cheerful in a dire situation; To proceed with a task, ignoring an upcoming hazard, hoping for a good outcome.
2. (idiomatic, US) To enter a situation with little or no understanding of the possible consequences.
Both meanings seem to apply these days as mentions of the bigger, badder and far more frightening relative of “recession” begins making the rounds in the media.
So, the question is, is the worst-case scenario for stress as bad as it might ought to be, specifically as regards home sales prices. Cost-to-rent and household income trendline comparisons have been proferred as the free-market cathartic to excess capacity, lack of affordability, and a restoration of order to real estate transactions sometime in the year ahead. Yale economist Robert Shiller has steered us toward expectations of a 36% price correction, largely based on those venerable trend anchors setting the norm for home prices across more extensive longitudinal time-period.
Calculated Risk’s blog raises concerns about the FDIC’s Capital Assistance Program scenarios, perhaps because of a healthy measure of skepticsm about whence the assumptions on how to stress-test banks for potentially worsening conditions.
Here’s how he queues up focus on the respective “baseline vs. alternative more adverse” scenarios. Worst case is supposed to be covered by the more adverse range.
Click on graphic to access Calculated Risk's analysis.
Then, CR maps what the two scenarios look like.
Graphic: Courtesy of Calculated Risk
The issue is this. Is the only thing we have to fear fear itself? Or maybe we should be afraid that we’re not fearful–or realistic enough–for what’s still ahead? Housing and the mortgage-backed meltdown are the first wave. Credit cards and commercial real estate tidal waves are still ahead.
We have to begin to reckon with whether the leadership instinct to be contagiously optimistic is realistic enough to pursue a strategy that can match the magnitude of the challenge. We can’t just be whistling past the graveyard.
Highlights and Lowlights
This is taken directly from Ben S. Bernanke’s Semiannual Monetary Policy Report to the Congress, Before the Committee on Banking, Housing and Urban Affairs, U.S. Senate. Focus on what’s underlined and in blue (our emphasis):
Recent Economic and Financial Developments and the Policy Responses
As you are aware, the U.S. economy is undergoing a severe contraction. Employment has fallen steeply since last autumn, and the unemployment rate has moved up to 7.6 percent. The deteriorating job market, considerable losses of equity and housing wealth, and tight lending conditions have weighed down consumer sentiment and spending. In addition, businesses have cut back capital outlays in response to the softening outlook for sales as well as the difficulty of obtaining credit. In contrast to the first half of last year, when robust foreign demand for U.S. goods and services provided some offset to weakness in domestic spending, exports slumped in the second half as our major trading partners fell into recession and some measures of global growth turned negative for the first time in more than 25 years. In all, U.S. real gross domestic product (GDP) declined slightly in the third quarter of 2008, and that decline steepened considerably in the fourth quarter. The sharp contraction in economic activity appears to have continued into the first quarter of 2009.…
The principal cause of the economic slowdown was the collapse of the global credit boom and the ensuing financial crisis, which has affected asset values, credit conditions, and consumer and business confidence around the world. The immediate trigger of the crisis was the end of housing booms in the United States and other countries and the associated problems in mortgage markets, notably the collapse of the U.S. subprime mortgage market. Conditions in housing and mortgage markets have proved a serious drag on the broader economy both directly, through their impact on residential construction and related industries and on household wealth, and indirectly, through the effects of rising mortgage delinquencies on the health of financial institutions. Recent data show that residential construction and sales continue to be very weak, house prices continue to fall, and foreclosure starts remain at very high levels.
The financial crisis intensified significantly in September and October. In September, the Treasury and the Federal Housing Finance Agency placed the government-sponsored enterprises, Fannie Mae and Freddie Mac, into conservatorship, and Lehman Brothers Holdings filed for bankruptcy. In the following weeks, several other large financial institutions failed, came to the brink of failure, or were acquired by competitors under distressed circumstances. Losses at a prominent money market mutual fund prompted investors, who had traditionally considered money market mutual funds to be virtually risk-free, to withdraw large amounts from such funds. The resulting outflows threatened the stability of short-term funding markets, particularly the commercial paper market, upon which corporations rely heavily for their short-term borrowing needs. Concerns about potential losses also undermined confidence in wholesale bank funding markets, leading to further increases in bank borrowing costs and a tightening of credit availability from banks.
Recognizing the critical importance of the provision of credit to businesses and households from financial institutions, the Congress passed the Emergency Economic Stabilization Act last fall. Under the authority granted by this act, the Treasury purchased preferred shares in a broad range of depository institutions to shore up their capital bases. During this period, the Federal Deposit Insurance Corporation (FDIC) introduced its Temporary Liquidity Guarantee Program, which expanded its guarantees of bank liabilities to include selected senior unsecured obligations and all non-interest-bearing transactions deposits. The Treasury–in concert with the Federal Reserve and the FDIC–provided packages of loans and guarantees to ensure the continued stability of Citigroup and Bank of America, two of the world’s largest banks. Over this period, governments in many foreign countries also announced plans to stabilize their financial institutions, including through large-scale capital injections, expansions of deposit insurance, and guarantees of some forms of bank debt.
…
With the federal funds rate near its floor, the Federal Reserve has taken additional steps to ease credit conditions. To support housing markets and economic activity more broadly, and to improve mortgage market functioning, the Federal Reserve has begun to purchase large amounts of agency debt and agency mortgage-backed securities. Since the announcement of this program last November, the conforming fixed mortgage rate has fallen nearly 1 percentage point. The Federal Reserve also established new lending facilities and expanded existing facilities to enhance the flow of credit to businesses and households. In response to heightened stress in bank funding markets, we increased the size of the Term Auction Facility to help ensure that banks could obtain the funds they need to provide credit to their customers, and we expanded our network of swap lines with foreign central banks to ease conditions in interconnected dollar funding markets at home and abroad. We also established new lending facilities to support the functioning of the commercial paper market and to ease pressures on money market mutual funds. In an effort to restart securitization markets to support the extension of credit to consumers and small businesses, we joined with the Treasury to announce the Term Asset-Backed Securities Loan Facility (TALF). The TALF is expected to begin extending loans soon.
…
Strains in short-term funding markets have eased notably since the fall, and London interbank offered rates (Libor)–upon which borrowing costs for many households and businesses are based–have decreased sharply. Conditions in the commercial paper market also have improved, even for lower-rated borrowers, and the sharp outflows from money market mutual funds seen in September have been replaced by modest inflows.
…
In light of ongoing concerns over the health of financial institutions, the Secretary of the Treasury recently announced a plan for further actions. This plan includes four principal elements: First, a new capital assistance program will be established to ensure that banks have adequate buffers of high-quality capital, based on the results of comprehensive stress tests to be conducted by the financial regulators, including the Federal Reserve. Second is a public-private investment fund in which private capital will be leveraged with public funds to purchase legacy assets from financial institutions. Third, the Federal Reserve, using capital provided by the Treasury, plans to expand the size and scope of the TALF to include securities backed by commercial real estate loans and potentially other types of asset-backed securities as well. Fourth, the plan includes a range of measures to help prevent unnecessary foreclosures.
…
The Economic Outlook and the FOMC’s Quarterly Projections
… Policy makers substantially marked down their forecasts for real GDP this year relative to the forecasts they had prepared in October. The central tendency of their most recent projections for real GDP implies a decline of 1/2 percent to 1-1/4 percent over the four quarters of 2009. These projections reflect an expected significant contraction in the first half of this year combined with an anticipated gradual resumption of growth in the second half. The central tendency for the unemployment rate in the fourth quarter of 2009 was marked up to a range of 8-1/2 percent to 8-3/4 percent. Federal Reserve policymakers continued to expect moderate expansion next year, with a central tendency of 2-1/2 percent to 3-1/4 percent growth in real GDP and a decline in the unemployment rate by the end of 2010 to a central tendency of 8 percent to 8-1/4 percent.…
This outlook for economic activity is subject to considerable uncertainty, and I believe that, overall, the downside risks probably outweigh those on the upside. One risk arises from the global nature of the slowdown, which could adversely affect U.S. exports and financial conditions to an even greater degree than currently expected. Another risk derives from the destructive power of the so-called adverse feedback loop, in which weakening economic and financial conditions become mutually reinforcing. … If actions taken by the Administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability–and only if that is the case, in my view–there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery.
…
At the time of our last Monetary Policy Report, the Federal Reserve was confronted with both high inflation and rising unemployment. Since that report, however, inflation pressures have receded dramatically while the rise in the unemployment rate has accelerated and financial conditions have deteriorated. In light of these developments, the Federal Reserve is committed to using all available tools to stimulate economic activity and to improve financial market functioning.
…
Encouraged???
U.S. Department of Vocabulary Minting
Seeking a new term–preferably confidence-inspiring–for ”bank failures.” Michael Shedlock, aka Mish, has an analysis of recent failures from the FDIC “Failed Bank List.”
Euphemists Anonymous, now’s the time to speak or forever hold your peace.
Calculated Risk highlights a New York Times article that sparks the need for this new terminology. In the article, Failed Banks Pose Test for Regulators, CR notes the F.D.I.C. is having trouble with the volume of troubled assets it must dispose of through auctions.
… The F.D.I.C. faces tough choices … every day as it struggles to manage $15 billion worth of loans and property left from failed banks. If still-to-be-sold assets from IndyMac Bancorp of California, whose demise last year was the fourth-largest bank failure, are included, the number jumps to $40 billion.
The F.D.I.C. inherited the collection of loans and property after the failure of 25 banks in 2008, compared to just three in 2007. Thirteen more have failed this year, including four on Friday night, and no one doubts that more are on the way. The F.D.I.C., which insures bank deposits and ultimately has responsibility for liquidating failed banks, is selling hundreds of millions of dollars worth of loans through eBay-like auction sites.
Getting investors to move–like getting home buyers to move–in this environment where assets of all classes are in free-fall, doesn’t happen with a snap of the fingers.
Too This, Too That–Geithner Mans Up for Battle with Financials Tailspin
Here’s the New York Times’ David Brooks in a sneak preview sum up of the new U.S. Treasury Secretary Timothy Geithner’s plan for use of the second half of the $700 billion financial system rescue plan.
Tim Geithner
Geithner’s plan is huge but also disciplined. It’s designed by someone aware of government’s limitations.
Geithner has been working the financial meltdown for a while. The basic lesson he has drawn is that the federal government has been too constrained. Occasionally, policy makers would step on the accelerator and bail out a bank, but then they’d step on the brake, worrying about moral hazard or inflation.
It’s time to be heavier on the accelerator, he says: “It goes against the basic instincts of anybody who is understandably worried about using taxpayer money carefully, about moral hazard, about long-term credibility issues. But if you don’t do it now, the market will know you’re going to have to do it later.”
Some economists leave the impression that the banking sector is a rotting corpse, hopelessly polluted by valueless toxic assets. Geithner takes a different view. He agrees that many bankers did things that are “reprehensible and deeply troubling.” But the big uncertainty is not inside the banks; it’s in the broader economic climate.
Geithner’s plan includes a “comprehensive housing program,” which he says will be announced in the next couple of weeks.