What does it mean that the Treasury Department now wants to "encourage small, veteran-, minority- and women-owned private asset managers" to participate in the Geithner plan to get toxic assets off the balance sheets of ailing banks?
On Monday, the Treasury announced several tweaks to the plan, including this:
To ensure a diversity of participation, the Treasury will encourage small, veteran-, minority- and women-owned private asset managers to partner with other private asset managers, if necessary, in order to meet the criteria identified above for assets under management and ability to raise private capital.
An early criticism of the Geithner plan was that its focus on requiring the asset managers that could participate to be able to raise at least $500 million in private capital and have a minimum of $10 billion in "eligible assets" under management, effectively ruled out anybody except Wall Street's already existing elite from playing. Why should only big institutional investors be allowed in? As one commenter at the Baseline Scenario put it, while recommending that the government find a way for individual investors to participate, "I think the willingness of the administration to do such a thing would tell us a lot about whose for whose interest they are really looking out."
So in that context, one could argue that the administration is listening to critics, although I am sure that conservatives are already decrying the insertion of political goals into the Geithner plan.
But if the Treasury was really listening to critics, then it should have taken the opportunity presented by today's announcement to unveil some changes that would address far more substantive criticisms -- specifically, the charge that Wall Street is going to manipulate the plan to its own advantage. I don't agree with Spencer Bachus, the ranking Republican member of the House Financial Services committee, very often, but he's absolutely right when he says "it would mark 'a new level of absurdity' if financial institutions were 'colluding to swap assets at inflated prices using taxpayers' dollars.'" Jeffrey Sachs also slams the plan today for the "extraordinary" opportunities it offers "for banks to game the plan."
The term sheet for what has been dubbed the "Legacy Securities" part of the Geithner plan includes a section on "Governance and Management" that could be construed as forbidding some of the shenanigans that are being raised as possibilities, but I, for one, would be far more reassured by more attention being paid to how the system can be manipulated than to whether or not to encourage participation by veteran- and women-owned business. The latter seems like window dressing; the former seems a make-or-break proposition.
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