Geithner got it right

We may have missed what Treasury Secretary Timothy Geithner said Tuesday, Feb. 10.

Over the past couple of weeks, we heard Geithner was working on a plan. Pieces leaked out here and there; the bad bank was in, the bad bank was out, the bad bank was in again but was now called an aggregator bank. Even President Obama on Monday night told us that Geithner would give us "very clear and specific plans."

We were all expecting to see a grand plan, with term sheets and a 100-page blueprint with explanatory details. After all, wasn't it Geithner, then president of the New York Federal Reserve Bank that held the world together from mid-September through late October last year?

But during his speech on Tuesday, I, and I suspect you, had a flashback to Oct. 13, when Interim Assistant Secretary for Financial Stability Neel Kashkari outlined the Treasury's plan to fix the capital markets. Little specifics, but a broad framework. That speech was followed by further broadstroke announcements followed by term sheets for programs that were open for participation over a few week period, or for programs that still have not been implemented. Or, quite frankly, programs the Treasury had to later create term sheets for to explain after the fact.

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Granted, last fall the Treasury Department had no choice. They had to go from fire to fire to keep the whole house from burning down. But we needed a little more certainty, a little more clarity, a little more direction. We have that, we can pretty much handle any situation.

Geithner appeared to have been training for this job his whole career, he certainly was very familiar with the problems and would have the answers. We hoped -- no, expected -- that he would give us direction, stop the ad hoc approach of the past four months, give us "very clear and specific plans."

He didn't. Instead we got financialstability.gov, a Web site. We expressed our disappointment on TV and in print and in a falling Dow.

But did Geithner actually deliver?

When you read his plan carefully, review his testimony before the Senate Banking and Budget committees this week, and watch his interviews that appeared on CNBC and on Bloomberg News, I think he told those of us in the capital markets that we need to come up with the solutions, and by the way he has a really big checkbook.

Geithner did, after all, announce the expansion of the New York Federal Reserve Bank's Term Asset-Backed Securities Loan Facility program, or TALF, by $800 billion, and that TALF would now include Commercial Mortgage-backed Securities, or CMBSs. No small, or easy, matter that.

But TALF only addresses AAA-rated securities. Where was our "bad" or "aggregator" bank? What were we to do with the "illiquid," "toxic" or "legacy" assets that could not be parked at the New York Fed?

I think here we need to face a basic fact.

The assets involved in our current situation are not akin to the assets involved in Mellon Bank's assignment to Grant National Bank, or the assets subject to the RTC or for that matter the assets involved in Sweden's banking crisis in the 1990s.

In fact, the financial assets we need to deal with in our current situation barely existed during those periods, let alone in the amount and complexity that now exist in the 21st century.

Take a look at a financial statement that has these assets, and look at the disclosure under those assets that are described as Level 2 and Level 3 assets (designations thanks to our "friend," FAS 157. There are securities backed by commercial real estate, residential real estate, car loans, credit cards, SBA loans and student loans. Even within these broad categories you have further fragmentation, fixed, floating, auction rate, prime, subprime, etc.

And within each category and subcategory you have different levels of performance and default rates. These securities are pretty much held by investors all over the place with many subject to servicing arrangements that make solving the problem difficult.

And we really expected the Treasury Department to come up with a single detailed plan for that?

With that as your back drop, now re-read Section 2 of Geithner's fact sheet, the lone document available on the Web site this past Tuesday.

In outlining his Public-Private Investment Fund, Geithner specifically mentions three important points.

First, the FDIC, Fed and U.S. Treasury are all involved. That tells me that all of the tools and programs previously announced by each of these institutions (including elsewhere in the fact sheet) may be worked into any solution to our current situation.

Second, he wants private capital to be involved (in later testimony he pointed out that private capital would be expected to take the first loss position). No specifics on how or in what amount, but its inclusion is a necessary element.

And third, oh, by the way, he is willing to put up to one trillion dollars to make this work.

In the testimony and interviews Geithner gave over Tuesday and Wednesday, he repeatedly said the Public-Private Investment Fund would require involvement of the private sector to design and implement it properly. Which only makes sense, since we honestly created an amazing and complex capital market, and our collective talent and capital will be needed to create an even more amazing yet less complex capital market to take its place.

Over the last few months, our new normal has been to focus on private jets, executive compensation and corporate junkets. Our new normal has been to focus on keeping up with the oversight panels that have oversight panels. Our new normal has been to discuss whether the United States is becoming a socialist state. Our new normal has been focused on waiting for the federal government to tell us how to fix the mess in the capital markets.

But our new normal should be focused on the secretary of the Department of the Treasury of the United States of America having told us at 11:30 a.m. this past Tuesday that he had $1.8 trillion in new money devoted to help us fix our problem. We will need to create different solutions for different categories and subcategories of subject assets to get the whole system working again. One size will not fit all; we are just going to have to face that and deal with it.

I say we get to work and take him up on his offer. I started Wednesday morning.

You?

Marvin Miller is a corporate partner in the New York office of Winston & Strawn LLP who concentrates his practice on financing.

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