U.S. Treasury Bailout

The Treasury's plan to isolate toxic assets appears to be thoughtful. Its strength is the reliance on private sector valuation of assets, the weakness may be having the private sector administer the assets under FDIC guarantee.

The document correctly identifies the lack of liquidity as the colonic blockage of the system and is on the right track in trying to arbitrage or bridge the time needed to find a more realistic balance between information and valuation. Inviting private investors is a good move to assure those with "skin in the game" are valuing these assets and not politicians! Nevertheless, only the details of the contracts will tell if terms sufficient to offset the risks inherent in the worst paper will attract speculators. There is not enough evidence that long term investors would be interested at this time because the banks are most likely to dump the worst quality paper into this program first and retain the better ones.

No bank wants to incur more massive write downs or have write downs already taken to be determined as having been insufficient. Already exhausted stockholders would muster another breathe to whip them anew in the marketplace.

While it will be in the best interest of the new equity owners of these assets to maximize their returns, with the 6 to 1 leverage, this may mean selling quickly or foreclosing rapidly to realize any value above the bid. This may not serve the public policy piece as the Administration may have hoped. Earlier foreclosures are a blessing and a curse. The blessing is the more direct resolution of poor loans, but the curse of exacerbating additional negative public sentiment does little to bolster consumer confidence.

On balance, getting bankers to lend again is an essential first step and providing greater clarity about their real capital levels is important. Nevertheless, it would have been nice to see some extra discipline implemented in the governance of the banks themselves when the opportunity is most ripe. Bank boards have not been held adequately responsible for their role in the financial "train wreck".

Perhaps we can look forward to additional measures in the future if this plan works. If it doesn't, I suppose no rules or discipline will matter very much at all.