The Stock Market Roars!
Mar 24, 2009
Posted by Jody Eisenman | Filed under Uncategorized
As Timothy Geithner finally unveiled details of his plan to get the toxic assets off the banks’ balance sheets, the equity markets exploded on the upside. Not surprisingly, the financials led the advance. The Dow closed up over almost 500 points to finish at 7775. Under the plan, private equity would bid for bank assets with the government putting up most of the money. What I find rather amusing (and shocking!) is that the government is encouraging private equity to use leverage to buy these loans. If you remember, excess leverage is what got us here in the first place!
I have my doubts about whether this plan can work for the following reasons:
- The plan does not address the gap between what investors are willing to pay and what the banks are willing to sell them at. For example, if I thought the assets were worth 30 cents/dollar and the bank thought it was worth 50 cents/dollar, would having the government give me 6/1 (or perhaps 12/1) leverage induce me to pay 50?
- If the government is putting up most of the capital and taking most of the risk, what exactly do they need private equity for? Why not just buy the assets by nationalizing the banks?
- If private equity is unwilling to overpay, then only the most cash starved banks will participate.
In the end, Wall Street is at least happy over the fact that this is a real plan, as opposed to more rhetoric. I expect the market volatility to continue.
March 24th, 2009 at 1:47 pm
I see this as a test run for eventual full blown nationalization of some of the banks. If Geithner’s pan doesn’t work, at least the Treasury can claim they tried the least radical option, and now are left with nationalization, which has always been too controversial and radical to undertake. No one can fault them for trying the least controversial approach first.