Tuesday, February 24, 2009

Timothy Geithner A'int Willie Mays

Has it occurred to anyone that when Treasury Secretary Timothy Geithner speaks or unveils a tweaking of the banking system, the stock market plunges?

And when Fed Chairman Ben Bernanke issues a statement or addresses Congress, as he did Tuesday, the Dow rises by 231 points? And, Bernanke's remarks to the Senate Banking Committee were not all that upbeat.

Are we as sideline observers placing too much emphasis on the Dow Jones Industrial Averages, Standard & Poor and NASDAQ reflecting the whims of skittish investors?

I don't know. It does occur to me that judging the economic meltdown based on a scoreboard of whom scores the most points is not the best way to boost consumer confidence.

Geithner is an enigma. His credentials for Treasury Secretary were so impeccable we had to turn our noses to the fact he didn't pay $43,000 in back taxes until tapped for the job. Now more and more market analysts are wondering if he's up to the task.

On Chris Matthews' "Hardball" show Monday, self-declared market guru Jim Cramer and a university economics professor both called for Geithner's resignation. That may be a little harsh. As I recall, Willie Mays went something like 0-25 before his first Major League hit in a career that landed him in the Hall of Fame.

The rap on Geithner seems to be he is sending mixed signals to banks interpreted by some as the "N" word: Nationalization. The government has controlling interests now of Fannie Mae, Freddie Mac, insurance giant A.I.G. and soon about half the preferred stock of Citigroup.

Geithner has revamped a controversial $700 billion bank bailout program to include steps to partner with the private sector to buy rotten assets held by banks as well as expand government ownership stakes in them — all with the hopes of freeing up lending. He's asking investors to gamble on the price of acquiring the bad mortgages.

Reports MarketWatch:

It seems that nothing, no matter how much money gets thrown at the U.S. economy, can satisfy this market or stanch the bleeding. Day after day, we're confronted with a steady stream of lower earnings, disappointing forecasts and sinking stock prices. The market just refuses to be appeased.

Reports The New York Times:

The government face(s) mounting pressure to put billions more in some of the nation’s biggest banks, two of the biggest automakers and the biggest insurance company, despite the billions it has already committed to rescuing them.

The government’s boldest rescue to date, its $150 billion commitment for the insurance giant American International Group, is foundering... Separately, the Obama administration confirmed it was in discussions to aid Citigroup, the recipient of $45 billion so far, that could raise the government’s stake in the banking company to as much as 40 percent... The Treasury Department named a special adviser to work with General Motors and Chrysler, two of Detroit’s biggest automakers, which are seeking $22 billion on top of the $17 billion already granted to them.

All these companies’ mushrooming needs reflect just how hard it is to stanch the flow of losses as the economy deteriorates. Even though the government’s finances are being stretched — and still more aid might be needed in the future — it is being forced to fill the growing holes in the finances of these companies out of fear that the demise of an important company could set off a chain reaction... In an unexpectedly assertive joint statement after two weeks of bank stock declines, the Treasury Department, the Federal Reserve and federal bank regulatory agencies announced that the government might demand a direct ownership stake in major banks that do not have enough capital to weather a deeper downturn. The government will begin conducting a test of the banks’ financial health this week.

Meanwhile, Bernanke told Congress Tuesday he hoped that the current recession will end this year, but said there were significant risks to that forecast. Any economic turnaround will hinge on the success of the Fed and the Obama administration in getting credit and financial markets to operate more normally again.

He said that the Fed and other Washington policymakers won’t be able to break a vicious cycle where disappearing jobs, tanking home values and shrinking nest eggs are forcing consumers to cut back sharply, worsening the economy’s tailspin. In turn, battered companies lay off more people and cut back in other ways.

“To break that adverse feedback loop, it is essential that we continue to complement fiscal stimulus with strong government action to stabilize financial institutions and financial markets,” Bernanke said.

Although Bernanke didn’t mention any financial institutions by name, Citigroup Inc. — the industry’s troubled titan — apparently is in line for additional government help.
Sen. Bob Corker, R-Tenn., worried the government was “creeping” toward bank nationalization through a new option announced by the administration Monday. The new plan allows the government to greatly expand its ownership in a bank by converting preferred shares into common shares.

"It is not nationalization,” Bernanke said. Corker was skeptical about the effectiveness of bank-rescue efforts saying he saw a continuation of “sort of dead-man walking, zombie bank.”

When pressed about how much more money the government might need to shore up the nation’s troubled banks, Bernanke didn’t give a figure and said it would depend on the health of banks, how the economy evolves and the margin of safety that regulators believe is needed.

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