Geithner and the Markets
Feb 12, 2009
Posted by Jody Eisenman | Filed under Uncategorized
After Geithner spoke on Tuesday, the market went into a tailspin, eventually dropping 380 points. We regained about 50 points today. I thought Geithner, like his boss Obama, spoke well. However, the speech was long on rhetoric and rather short on substance. As I mentioned Monday, he spoke about some sort of public/private partnership, but provided no specific details on how this could work. Private equity does not have a real appetite for these bad loans. There are probably hundreds of billions for sale with no real takers. Again, the problem is valuation. The banks would love to have these bad investments taken off their books at or close to face value. Dream on. There are way too many for sale, and the appetite is not great. In addition, thanks to bank secrecy rules, it is unclear what many of these loans (which are packaged in fancy names like SPVs or CDOs) actually consist of. Therefore, the only real buyers are for limited amounts at steep discounts. This does not help the banks as they are already under water thanks to their over leverage techniques.
Many people are waiting for this magic bullet that will clean up the problems, but I don’t think one exists. Any solution is going to involve a lot of pain. It is very possible that nationalization of at least the worst banks is the best solution. Meanwhile, as the recession deepens, banks continue to have difficulty earning their way out of this mess. Investment banking revenue is down sharply (although the first IPO since November was priced today and traded higher), commission and fee business is down, and credit card default rates are climbing quickly. As with the auto industry, there is certainly no guarantee that even with additional billions in aid, that the banks won’t need more money 3-6 months from now.
Meanwhile, the recession continues to spread rapidly across Main Street as businesses continue to close and the layoffs continue. The housing market has still not stabilized. Lets hope Obama’s stimulus plan can have a positive effect.
