HTWW posting will be light today for two reasons: 1) I am interviewing Jon Wellinghoff, the new chairman of the Federal Energy Regulatory Commission, and 2) I will be spending the bulk of the day reading the 150-page Congressional Oversight Panel's (COP) April report examining the first six months of the Treasury's Troubled Assets Relief Program (TARP).
Call me a banking crisis geek, but I found this description of the Oversight Panel's approach to evaluating the merits of three different scenarios for the banking industry -- liquidation, receivership or subsidization -- irresistible:
To place these alternatives in context, the report evaluates historical and contemporary efforts to confront financial crises and their relative success. The Panel focused on six historical experiences: (1) the U.S. Depression of the 1930s; (2) the bank run on and subsequent government seizure of Continental Illinois in 1984; (3) the savings and loan crisis of the late 1980s and establishment of the Resolution Trust Corporation; (4) the recapitalization of the FDIC bank insurance fund in 1991; (5) Sweden's financial crisis of the early 1990s; and (6) what has become known as Japan's "Lost Decade" of the 1990s. The report also surveys the approaches currently employed by Iceland, Ireland, the United Kingdom, and other European countries.
I would also like to call out the conclusion of the executive summary, with respect to the Geitner Private Public Investment Plan. (Italics mine.)
If its assumptions are correct, Treasury's current approach may prove a reasonable response to the current crisis. Current prices may, in fact, prove not to be explainable without the liquidity factor. Even in areas of the country where home prices have declined precipitously, the collateral behind mortgage-related assets still retains substantial value. In a liquid market, even under-collateralized assets should not be trading at pennies on the dollar. Prices are being partially subjected to a downward self-reinforcing cycle. It is this notion of a liquidity discount that supports the potential of future gain for taxpayers and makes transactions under the CAP and the PPIP viable mechanisms for recovery of asset values while recouping a gain for taxpayers.
On the other hand, it is possible that Treasury's approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.
You won't get very far questioning the integrity of Elizabeth Warren, chair of the Congressional Oversight Panel, and a fierce advocate for ordinary Americans against the depredations of Wall Street. But what strikes me here is the reasonableness of her tone. There is obviously a very good case to be made that the Treasury's assumptions are incorrect; that the banks are not facing a liquidity issue, but are fundamentally insolvent. But, judging from the executive summary at least, Warren is taking the Treasury's plan in good faith. That is a breath of fresh air compared to some of the more overheated critics of the new administration. I'm looking forward to reading the entire report.