US taxpayers, the Geithner plan and quantitative easing vs banks lack of mark to market of balance sheet assets

* First off
Lets make this clear; The market is always right and markets are inefficient. The only thing that matter in the marketplace is what the market does. Timing is everything. Sounds contradictory?Bottom line; respect the price action, it will always provide information in itself. However, the key is identifying that information and interpreting it. For instance, is the market rallying because the Mr Geithners plan is a good plan or is there something else driving it?
For the time being, I believe the market is rallying for other reasons. I will not spend time elaborating why, apart from the mechanics of a bear market rally. Now, with this made crystal clear, back to the fundamental dilemma that the Geithner plan is trying to sort out.


*What would be the quickest and easiest way to get lending for banks with "toxic assets" going again?

Answer; Get rid of the "toxic" assets. If not possible, mark them to market.
Its as simple as that. However, there are some, eehhumm, drawback(s); Many banks with these "toxic" assets have big discrepancies between balance sheet and market values. This will make banks become insolvent in the mark to market process. Dissolving themselves while creating the solution so to speak.
This goes for the vast majority of banks globally which are burdened by "toxic" or bad assets. According to Credit Suisse, only 15% of US banks have their assets marked to market.


*Minimizing the taxpayer injury
The question then becomes how to make taxpayers taking as small a hit as possible.
This involves lettings shareholders loose the value of their capital invested, it would further involve bondholders of banks doing the same. Depositors and contracts made with other banks, corporates and other financial instituions would have to be honoured though, not create havoc.

This way, at least some money would be saved for taxpayers. Post this I would propose the "new bank" model, (I have mentioned this one in earlier pieces), where good assets would be lifted out from the "old" bank into a "new" one. The remaining debts and "toxic assets" would be left in the "old" one. Taxpayers would then hold it til it would be possible to offload any or all of it to the market at a point in the future deemed "appropriate". Meanwhile, the "new" bank would be completely refinanced by private capital/investors. This would most likely be no problem. I would certainly want to be a shareholder in a bank with no bad loans or assets. It is per definition a moneymaker.


*The Geithner plan means a higher risk for increased costs without solving the underlying problem
In my view, the Geithner plan is a much costlier version for the taxpayers. It is cost inefficient and it burdens the taxpayer too much vs the banks. Most important of all;
1) It still does not come to grips with the underlying issue; the overvaluation of US banks balancesheet assets. As long as they remain overvalued, lending will NOT start again.
2) Banks management will still be in control of the (non riskmanagement) of their balance sheet. They will be driven by other incentives than the state when it comes to "come clean", thus postponing lending and a revival for the economy.
3) The risk with Mr Geithners plan is that banks will simply not sell the most "toxic" assets on their balance sheet if bids are "too low". (Meaning the discrepancy between their balance sheet and the market price offered would incure "too big" losses.) Hence, the most "toxic" assets will remain on their balance sheets, effectively clogging up new lending.

One way would be for the US treasury to force banks marking their assets to market values achieved via the auctions. I very much doubt this will happen since then the US treasury and Mr Geithner would have presented a completely different plan in the first place. Mr Geithner and the US treasury must be very aware that banks are insolvent if their balancesheets assets are marked to market.
4) The Geithner plan wants private investors buy "toxic" assets, with the US taxpayers sorting out the private investors financing. (Up to six times when it comes to "legacy loans"(!), "legacy securities" is only financed 1;1 by the US taxpayers). Taxpayer leveraging finance in a deleveraging world. It does not make sense to me.



*High risk solution creates high risks for the US - and the world

Quantitative easing is another inefficient way of trying to get to grips with this problem instead of attacking the root of it.
It follows the same pattern as the Geithner plan. Increase leverage further in order to roll losses forward and smoothen it out over time. Not good and I dont like it. Quantitative easing has never worked from a historical perspective and is not likely to work well now either, especially since we know exactly where the problem lies.


*Deleveraging in an orderly fashion is the key -because deleveraging should and must take place
One risk from here is that the US exports an easing of monetary conditions, creating further misallocations of capital, not completing the necessary deleveraging process set in motion.


As always, good luck



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