Judging by the reaction of the stock market, Wall Street was very unhappy with Treasury Secretary Tim Geithner's speech Tuesday morning outlining the Obama administration's new strategy for resolving the financial crisis and "getting credit flowing again." Ten minutes after the speech ended, the Dow had fallen 300 points and appeared to be headed further south.
Should we care about Wall Street's dismay? Given the news earlier today that Geithner had been pushing hard not to impose punitive conditions on banks receiving government aid, one might have expected investors to be more jubilant. Maybe we should be delighted at their unhappiness: The most optimistic interpretation of the stock market swoon might be that investors were chastened by Geithner's stern tone and strong criticism of previous government measures taken to address the crisis. If Wall Street had reacted with glee to Geithner's speech, then the rest of us might have more reason to be discouraged, because the obvious implication would have been that the government was delivering another no-strings-attached bailout at the taxpayer's expense.
But I don't think that's why the market is so glum. Geithner started out strong, with a clear description of the plight we're in, and a clear explanation of why government needed to take swift and strong action. But, once again, the speech was short on details -- and no more so than on the critical question of how the government will address the problem of dealing with the toxic assets that have effectively rendered large portions of the nation's financial system insolvent.
If there was a moment during the speech when investor sentiment crystallized, it came when Geithner announced that "we are exploring a range of different structures" to deal with precisely that issue.
At this point in the game, that kind of vague assertion simply won't fly. It's all fine and good to declare that there is a plan for encouraging private capital to reenter the markets, with assistance from government, and somehow remove the busted mortgage-backed securities from the balance sheets of financial institutions. But similar assertions have now been made for many months, without any practical plan emerging for accomplishing such a task. When Geithner said "we are exploring a range of different structures" he was essentially admitting that we still don't have a clue how to do this. And that's why Wall Street is panicking, again.
As for the rest of the speech, I think it is fair to believe that the Obama administration will require greater transparency and accountability in how taxpayer money is disbursed, and tougher conditions in return for future infusions of capital. I think it is likely too that there will be a more aggressive plan to resolve homeowner financial stress than the previous administration pursued, although there too, Geithner's announcement that more details will be revealed of the homeowner rescue plan in "upcoming weeks" was not very illuminating. But none of that slices the Gordian knot. Banks are insolvent because they are sitting on trillions of dollars of assets that the market is assigning a very low value to. If the Treasury Department cannot figure out a way to make that problem go away, the only feasible alternative is nationalization of the failing banks and their wholesale, government-mediated restructuring.
Of course, Geithner made no reference whatsoever to the possibility of nationalizing the banks. Which further illustrates the huge dilemma the administration is in. Because if he had, the market would be even unhappier.
Next up: Geithner makes an appearance before the Senate Banking Committee, where the questions will undoubtedly be pointed. Let's hope he has some better answers.