Bad Idea
- Posted by ryan on May 3rd, 2009 filed in Economics, Policy/Politics
It has been aggravating to me to watch the finance and economics blogosphere become a place where every last policy move by the administration is asserted to be further evidence that its members are the hapless tools of the “banksters,” rather than well-meaning individuals struggling in difficult circumstances to make the best possible policy given significant constraints. And yet sometimes, one wonders just what the folks at Treasury are thinking:
US regulators will delay the release of stress test results for the country’s 19 biggest banks until next Thursday, after some lenders, including Citigroup and Bank of America, objected to government demands that they needed to raise billions in fresh capital.
Citi, one of the biggest victims of the crisis that has already been bailed out three times by the government, is believed to have been told by regulators that it needs more than $5bn in fresh capital, while BofA might need to convert $45bn in government preferred shares into common equity.
Both companies are still contesting the findings and might still persuade the government they need less, or no capital, according to people close to the situation. Citi’s own projections are believed to show the company will have hundreds of millions of dollars in excess capital.
This makes no sense at all, on any level. Not long ago I wrote that the government faced a problem with the stress tests — declare everyone a winner and markets greet the test results with an eyeroll, but declare some banks losers and markets get spooked if a plan isn’t in place to address their needs. Treasury seems to have hit on some absurd middle-ground in which it declares the winners winners and the losers losers, and then allows the losers to whine until their grade is changed to winner. It’s a response perfectly crafted to weaken confidence in banks and make the administration look stupid.
The situation is particularly ridiculous since the tests supposedly show that Citi needs only $5 billion in new capital, while basically everyone out there believes the amount is actually quite a bit higher than that. In other words, the results were barely credible to begin with; having not walked out on a limb at all, Treasury is now descending the tree and slinking off to a hole.
Here’s how this actually comes across. It must be incredibly obvious to Citigroup and the government that filling Citi’s capital hole at government expense couldn’t help but give taxpayers a majority stake in the firm, and possibly a large one. Not wanting that to happen, Treasury seems content to sit around hoping Citigroup can convince them that they don’t actually need the money, thanks to creative accounting, or really optimistic assumptions, or magic, but nothing anyone else is likely to accept as reasonable. Maybe the administration has good reasons for wanting to avoid a majority stake, and maybe it doesn’t, but either way they should have seen this coming from the moment they conceived of the stress tests. Either the results would be real, in which case this would be a possibility (if not an inevitability), or the results would be fake, in which case a lot of trouble would have been gone through simply to make Treasury look, once more, like half-witted, cowardly pawns of Wall Street.
I don’t actually think that’s what they are, and so I struggle to understand this move. If Treasury continues to make things this hard for its defenders, it will soon find itself without any.
May 3rd, 2009 at 3:16 pm
Ryan — One of the reasons why I like your work so much is that you’ve got a pretty good outrage meter — you don’t approach every piece of news as something to get worked up about. But I think you’re getting wound up a bit prematurely on this one. As you say after quoting the FT, “that makes no sense.” Which is why we should be a bit leery of taking the article at face value.
You’re normally an extremely savvy reader of the financial press. So who do you think placed this bit of inside info with the FT? Treasury? Not bloody likely.
How about Citi. Using the press to add some outside pressure to its special pleading? Stirring up a revolt-of-the-shareholders-about-to-be-diluted, plus the knee-jerk hysterical mistrust of the government by market-worshipers? Failing still to understand that nobody has any sympathy for Citi et al anymore and they’ve totally lost all crediblity? That scenario seems a whole lot more likely to me.
The stress tests are finally the triage that’s been called for since late summer and that Paulson refused to undertake. Geithner decided to limit the triage to the big boys, and the government has already declared that it’s not going to push any of the big boys into a resolution process. So everybody “passes” by definition, but a number of them (if not all) will need more capital.
Some will be able to raise it on their own a la Goldman. Others won’t. So now the talks with each bank before the release of the triage results are about how big each hole is, and the institution-specific plans (including timing and government role) for shoring up capital. In the process, the banks are all going to be trying to make the case they don’t need more, or that they’ll be able to eventually raise it in the markets under certain scenarios (like what happens with their credit cards), or that they’ll be able to earn their way to where they need to go.
These are normal discussions, and if asked by the FT, one assumes Treasury would confirm that they’re going on and that they’re the reason for the delay in releasing the test results. So far, all normal and what we should want Treasury to be doing.
What I DO fault Treasury for is its original schedule of releasing test results — they should have pencilled in more time for this stage of the proceedings.
Now if, after all is said and done, Treasury says Citi doesn’t need any more capital, then we can all raise a collective stink. But so far, I don’t see anything to suggest that’s a likely outcome.
We’ve only got so much outrage energy. This weekend a whole lot of it is being wasted on the non-scandal that the government played a bit of hardball with the Chrysler hedge funds. We don’t need a new faux scandal.
May 3rd, 2009 at 4:12 pm
I’m wondering if the tests weren’t meant to measure the public’s stress.
I agree, though on this: I’m convinced Geithner is a sharp guy with good intentions and some integrity, but it’s getting hard to find evidence for the case. At this point, the stress test process ought to be declared a failure, politics and the media blamed and the results kept dark.
May 4th, 2009 at 3:03 am
I, too, appreciate your even-handed commentary on Treasury, and agree with you they’re not making it easy to like them these days even for those of us who really want to. But on this: There’s always been provision in their announcement of results for time for banks to appeal the decisions. Why are we (or why is the FT) surprised that a government process is taking three days longer than it was supposed to? Or is it just the way that the FT is framing the story?
If the results come out and look substantially different than what’s been expected since forever, and it looks like there’s been changes made in the last few days… then it’s time to throw in the Treasury-is-trying towel. But over this?