Unstuck From The Moment: Financial Stability Plan to be Unveiled by Geithner Today

Ahead of Treasury Secretary Tim Geithner’s speech slated for 11am today, at which he will unveil the Obama administration’s plan to shore up the nation’s banks and get credit flowing again, Deborah Solomon and Damian Paletta report in today’s WSJ (Banks to Get Stress Test Before Aid):

• In an attempt to cast the program in a new light, the administration is renaming the Troubled Asset Relief Program the Financial Stability Plan.
• The expanded effort could see as much as $2 trillion in financing flowing through the system, according to Congressional officials briefed Monday night. The expanded Fed facility and the "bad bank" could each reach $1 trillion in size, both of which would be seeded with bailout funds.”
• The program will remain a part of Treasury but may eventually be separated.
• [As part of the plan] [m]any U.S. banks will be subjected to rigorous examinations [‘stress tests’] to see if they are healthy enough to lend before receiving additional financial aid, according to people familiar with the matter.
• In addition to fresh capital injections into banks, the new approach will include programs to help struggling homeowners; a significant expansion of a Federal Reserve program designed to jump-start consumer lending; and a private-public partnership to relieve banks of bad assets.

Separately, in his first prime time address as President, (see: Text of Obama’s Press Conference, Feb. 10, WSJ) President Barack Obama provided a briefing last night on the state of the economy, focusing on the economic recovery package that passed each house of Congress and now awaits a conference bill. He also spoke in general terms about the impending announcement of the bank rescue plan.

Regarding the economic recovery/stimulus package, Obama said:

• After many weeks of debate and discussion, the plan that ultimately emerges from Congress must be big enough and bold enough to meet the size of the economic challenges that we face right now.
• [T]he plan is not perfect. No plan is. I can't tell you for sure that everything in this plan will work exactly as we hope, but I can tell you with complete confidence that a failure to act will only deepen this crisis as well as the pain felt by millions of Americans. My administration inherited a deficit of over $1 trillion, but because we also inherited the most profound economic emergency since the Great Depression, doing a little or nothing at all will result in even greater deficits, even greater job loss, even greater loss of income, and even greater loss of confidence. Those are deficits that could turn a crisis into a catastrophe. And I refuse to let that happen. As long as I hold this office, I will do whatever it takes to put this economy back on track and put this country back to work.
• I want to thank the members of Congress who've worked so hard to move this plan forward. But I also want to urge all members of Congress to act without delay in the coming week to resolve their differences and pass this plan.
• We find ourselves in a rare moment where the citizens of our country and all countries are watching and waiting for us to lead. It's a responsibility that this generation did not ask for, but one that we must accept for the future and our children and our grandchildren. And the strongest democracies flourish from frequent and lively debate, but they endure when people of every background and belief find a way to set aside smaller differences in service of a greater purpose.
• That's the test facing the United States of America in this winter of our hardship. And it is our duty as leaders and citizens to stay true to that purpose in the weeks and months ahead. After a day of speaking with and listening to the fundamentally decent men and women who call this nation home, I have full faith and confidence that we can do it. But we're going to have to work together. That's what I intend to promote in the weeks and days ahead.

Regarding the impending announcement of the bank rescue plan, he added:

• Tomorrow [Tues. Feb. 10] my Treasury Secretary, Tim Geithner, will be announcing some very clear and specific plans for how we are going to start loosening up credit once again.
• And that means having some transparency and oversight in the system.
• It means that we correct some of the mistakes with TARP that were made earlier, the lack of consistency, the lack of clarity in terms of how the program was going to move forward.
• It means that we condition taxpayer dollars that are being provided to banks on them showing some restraint when it comes to executive compensation, not using the money to charter corporate jets when they're not necessary.
• It means that we focus on housing and how are we going to help homeowners that are suffering foreclosure or homeowners who are still making their mortgage payments, but are seeing their property values decline.

Responding to a question from Julianna Goldman of Bloomberg news, the President said:

• My immediate task is making sure that the second half of that money, $350 billion, is spent properly. That's my first job. Before I even think about what else I've got to do, my first task is to make sure that my Secretary of the Treasury, Tim Geithner, working with Larry Summers, my National Economic Advisor, and others, are coming up with the best possible plan to use this money wisely -- in a way that's transparent; in a way that provides clear oversight; that we are conditioning any money that we give to banks on them reducing executive compensation to reasonable levels; and to make sure that they're not wasting that money.
• We are going to have to work with the banks in an effective way to clean up their balance sheets so that some trust is restored within the marketplace, because right now part of the problem is that nobody really knows what's on the banks' books. Any given bank, they're not sure what kinds of losses are there. We've got to open things up and restore some trust.
• We also have to deal with the housing issue in a clear and consistent way. I don't want to preempt my Secretary of the Treasury; he's going to be laying out these principles in great detail tomorrow. But my instruction to him has been, let's get this right, let's create a template in which we're restoring market confidence. And the reason that's so important is because we don't know yet whether we're going to need additional money or how much additional money we'll need until we've seen how successful we are at restoring a sense of confidence in the marketplace, that the federal government and the Federal Reserve Bank and the FDIC, working in concert, know what they're doing. That can make a big difference in terms of whether or not we attract private capital back into the marketplace.
• And ultimately, the government cannot substitute for all the private capital that has been withdrawn from the system. We've got to restore confidence so that private capital goes back in.

In response to a question from Helene Cooper of the New York Times, he added:

• I'm trying to avoid preempting my Secretary of the Treasury, I want all of you to show up at his press conference as well; he's going to be terrific. But … one of my bottom lines is whether or not credit is flowing to the people who need it. Is it flowing to banks -- excuse me, is it flowing to businesses, large and small? Is it flowing to consumers? Are they able to operate in ways that translate into jobs and economic growth on Main Street? And the package that we've put together is designed to help do that. And beyond that, I'm going to make sure that Tim gets his moment in the sun tomorrow.

Mark-to-Market Debate Continues
We noted in our most recent post, and have covered this issue in prior posts (e.g. on some of the roundtables held last fall by the SEC and FASB on mark-to-market accounting and the credit crisis), that fair value or mark-to-market accounting is among the issues that crops up in discussions relating to the financial crisis and the bank rescue/stability plan.

Broadly speaking, there are generally two schools of thought - which may or may not necessarily be viewed as in conflict - depending where you stand: (a) that fair value (FV) or mark-to-market (MTM) accounting provides necessary transparency to toxic assets, and/or (b) that FV or MTM fuels a procyclical downward spiral in valuations of assets.

Somewhere in between, there may be a third school of thought, which may represent more of a compromise view: (c) that FV or MTM as currently constructed may contribute to an unnecessary downward spiral in valuations.

Readers of this blog normally tend not to post comments, but we received some very insightful comments on yesterday’s blog post, including comments about standard valuation procedures used by appraisers and recognized by the courts vis-à-vis the FV/MTM accounting rules. Additionally, at the suggestion of an Anonymous commenter on yesterday’s post, I added some links to a few more articles in the Comments section, such as Goldman Sachs CEO Lloyd Blankfein’s column supporting FV/MTM which appeared in yesterday’s FT, and a number of other articles; see the comments section of yesterday’s post for links.

Besides the articles I linked in yesterday, additional articles published late yesterday include: Geithner Needs to Fix Mark to Market Rules by Robert Holmes, TheStreet.com, and Mark to Market Reform More Important Than Stimulus by Brian Wesbury, Chicago Observer.

O’Neill, Snow Step Up, Speak Out on Bailout
I was particularly intrigued by the remarks of two former Secretaries of the Treasury: Paul O’Neill and John Snow, in an article by Brendan Murray published yesterday by Bloomberg News, O’Neill, Snow Call for Transparency, Clarity on Toxic Assets, especially O’Neill’s suggestion relating to ‘quarantining’ toxic assets. Here are some excerpts from the Bloomberg article:

• “We won’t get out of this mess and get lending returned to normal until the toxic assets are purged,” John Snow, who headed the department from 2003 to 2006, said in an interview today… “Private equity, which is pretty good at buying distressed assets, hasn’t been buying them because of this massive uncertainty as to what these things are worth,” Snow said.
• Guarantees “might energize the private sector to begin putting in capital.” Snow, 69, said a public auction of soured assets -- “put them on the Internet,” he suggested -- would help investors study them and determine their value.
• Paul O’Neill, secretary from 2001 to 2003, said in a separate interview that “a significant part of the problem we have now is the suspicion the markets have that everything is poison.” ... calling it “folly to try to value things that can’t be valued.” He said a new accounting method to quarantine bad assets might be a way out. “I know there’s not an accounting category for ‘quarantine,’ but I think this set of issues we have is worthy of creating a new category called ‘we don’t know,’” [O’Neill] said. “If I were running the Treasury, I would insist that everybody lay it out there and we can all work from the same set of facts." ... “If assets can’t be valued, they can’t be valued,” O’Neill said “So why don’t we admit that and why don’t we figure out a way not for the taxpayers to take on the burden but in effect put them in a quarantine account?” O’Neill said. “We’re frozen in place by conventions.”

I find it significant when former leaders speak out on an issue, particularly when their term was far enough back that they may be able to assess a situation without taking it personally. It will be interesting to see if any of Snow or O’Neill’s ideas play out in today’s Financial Stability Plan announcement.

O’Neill in particular has been outspoken. In an interview on NBC’s Meet the Press in October, 2008 he said of the factors leading up to the economic turmoil, “In general, the system lived in fantasy land.” Another interesting observation, 8:45 minutes into the interview, O’Neill said, “You know, I haven’t heard anybody say in this campaign, the 10,000 page Tax Code that we have is proof that we’re not an intelligent people.”

Some of you may not know that prior to becoming Secretary of the Treasury – in addition to his prior role as Chairman and CEO of Alcoa, O'Neill served as a member of what was then called the Public Oversight Board or POB, the (pre-Sarbanes-Oxley) precursor to the Public Company Accounting Oversight Board. Interestingly the POB’s website is still available at http://www.publicoversightboard.org/, which notes that it was founded in 1977 and terminated in 2002 when it transferred its responsibilities to the PCAOB.

O'Neill is also known for his association with rock star Bono of U2 in traveling the globe to address issues like world hunger when he served as Secretary of the Treasury; here’s a photo of O’Neill and Bono in 2002.

Looking through U2’s discography to see if there was an appropriate theme song for today’s pending announcement of the Financial Stability Plan, I believe people are hopeful - particularly with information gleaned from the triumvirate of oversight bodies charged with oversight of the TARP (GAO, COP, and the Special Inspector General) – that we are past the point of I Still Haven’t Found What I’m Looking For.

Therefore, in honor of the past and present Secretaries of the Treasury, I choose as a theme song for today’s post U2’s Stuck in a Moment You Can't Get Out of. First, its reminiscent of O'Neill's statement quoted in the Bloomberg article above: “We’re frozen in place by conventions.” Second, in contrast with the song's title, the lyrics actually talk about taking charge, and being confident that things will get better.

An excerpt from the lyrics appears below.

I'm not afraid of anything in this world
There's nothing you can throw at me that I haven't already heard …
You gotta stand up straight,
carry your own weight
These tears are going nowhere, baby
You've got to get yourself together
You've got stuck in a moment and now you can't get out of it
Don't say that later will be better now you're stuck in a moment
And you can't get out of it…
And if the night runs over
And if the day won't last
And if our way should falter
Along the stony pass…
It's just a moment
This time will pass

I don’t think that message is so different from the President’s closing remarks at his press conference last night, when he said: “I am the eternal optimist. I think that over time people respond to civility and rational argument. I think that's what the people of Elkhart and people around America are looking for. And that's what I'm -- that's the kind of leadership I'm going to try to provide."

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