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March 23rd, 2009
11:46 AM ET

Will the Geithner plan work?

[cnn-photo-caption image=http://i2.cdn.turner.com/cnn/2009/images/03/23/art.geithner.jpg]

David Gergen | Bio
AC360° Contributor
CNN Senior Political Analyst

In a famous exchange in Shakespeare’s play, Henry IV, Part 1, two characters by the name of Glendower and Hotspur are jesting over how to persuade others to follow them. Glendower says, “I can call spirits from the vasty deep,” to which Hotspur responds, “why yes, so can I and so can any man, but when you call them, will they come?”

Treasury Secretary Tim Geithner today summoned spirits from the vasty deep with his ambitious plan to persuade private investors to buy up the toxic assets of troubled banks. All of us have an interest in the plan succeeding – we need our banks to be healthy and able to lend again to consumers and small businesses; the stock market rallied sharply in the opening hours. But the real test will come over time: will the private investors actually come up and buy enough of the toxic assets? We may have to wait a number of weeks to know for sure.

What we do know is that the Obama administration is offering extremely favorable terms to the potential investors. The government, as The New York Times reported this morning, would lend private investors nearly 95 percent of the money for an investment. (Here’s an irony: at the very moment we are trying to deleverage the economy, the government is now using the principle of leverage to revive it). Moreover, if the investment goes bad, the private investor is only on the hook for the small portion it put in originally – not for the full amount of the purchase. Yes, the government will share in profits, but if the toxic assets go up sharply in value – as the government hopes – the private investor could make piles and piles of money.

Two questions immediately arise. The first is that raised by Paul Krugman, the Nobel-prize winning economist who has been slamming this plan unmercifully because he believes that Geithner has way too rosy a view of the underlying value of the assets. He thinks that investors, realizing that these assets aren’t really worth very much, won’t want to invest at the prices that the banks will insist on and the whole plan will ultimately fail. Instead, argues Krugman, the nation will waste incredibly valuable time on a flawed plan, allowing the economy to deteriorate still further, while instead we should be moving swiftly toward a government takeover of the banks, which he believes would stabilize the economy. We shall see who is right – Geithner or Krugman.

But there is a second question lurking that really only the President and Congress can answer: that is, whether private investors can have confidence that if they do invest, the lynch mob mentality we saw last week in Washington won’t come and plague them in the future. As the managing director of a major hedge fund told me recently, if this plan is good enough, our firm stands to make money. But then why should we invest if Washington is then going to get mad, take 90% of our profits from us retroactively and if I may be hauled up before Congress and vilified? Good question.

What this means is that the President and the Congress this week need to restore calm to the Capitol over the AIG bonuses, work out a solution that does not leave a threatening cloud over the financial industry, and provide more concrete assurances that the Geithner plan will work as advertised. Until they do that, it may be extremely hard for the Secretary – try as he might – to summon spirits from the vasty deep. Again, we all have a stake in his success.,


Filed under: 360° Radar • David Gergen • Economy • Finance • Treasury Secretary
soundoff (131 Responses)
  1. peggy

    This plan is nothing more than further fraud perpetrated against the american taxpayer. We are now on the hook for not only the cost of the purchase of the toxic paper which the treasury will over pay for then we are also on the hook for subsidizing 95% of the investor purchase. What is the sense of that. What schmuck in Congress and the Administration think that we do not understand what is going on. They all should be arrested for fraud.

    Here is a better idea to stabilize the economy.

    Force the "to big to fail" companies to write off all their bad paper and take the loss.

    If they are bankrupt let them be broken up and sold off into a more manageable sized operation.

    No bonuses for anyone. Period. Why should they be rewarded for destroying a company.

    Reinstate all the Glass/Steingall rules that were stripped out in the 90's with a one year period to restructure.

    There are about 60 million people in the US 55 years and older.

    Pay everyone of them $1.5 M with the following stipulations:

    The money is tax free and the only amount taxed after that is on the interest or income earned on the money.

    If they are employed they must retire.

    If they own a home they must pay off their mortgage. If they do not own a home they must purchase it with cash.

    They must purchase one new American made car within the first year.

    That should take care of unemployment, housing and the auto industry with a price tag of less than $100 M.

    Of course this makes to much sense for them to even consider it.

    March 23, 2009 at 5:08 pm |
  2. Jonf

    This pretty much seems to amount to what can be seen as an economic "crap shoot". Its got Las Vegas types of risk. The good things about Las Vegas is when you win – you really win. I just question whether this country is ready to make large "bets" on its future.

    The nationalization of banks would be the safest way to go – and perhaps assure people that we are less likely to falter in the future. Under the Geithner plan – we are all hoping that Congress gives President Obama the blank check that he needs. It might be nice to get a better idea of this before we go knee deep into toxic assets at a time when people (especially in the financial industry) are becoming increasingly leery of the governments involvement (think AIG and associated nonsense).

    I guess this is all more reason for President Obama to back off his multi-trillion dollar proposals for our everyday budget. It seems as if he thinks the financial crisis is an inconvenience that he needs to get us through before he embarks on his preferred agenda. Its not. I think to simply start to pull us out of this financial mess is enough for any single presidential term. If this plan doesn't work, we are going to need trillions more to pick up the pieces. At that point, I think we had better have it ready and not be spending it on so-called social reform.

    I am not an expert – just a novice. But I see that we are really taking lots of risks in many different directions when we need to be focused and conservative with whatever precious financial resources we have left.

    We run the risk of totally bankrupting ourselves while trying to make our economic mess less painful. All of this makes me very very nervous.

    March 23, 2009 at 5:07 pm |
  3. Jonathan of Virginia

    Oh and STEVE, Paul Krugman is a socialist knave. Why don't you limit your commentary to engineering matters in the future and spare yourself any further humiliation.

    March 23, 2009 at 5:07 pm |
  4. Bob Williams

    The media needs to do this country a service. True, they must report the news, but spend some time giving credit to an administration that is trying to pull us out of this mess! The comments of the pundits and "strategists", whatever that means, carry weight by repetition. Enough!

    Let's give Obama and his administration some time to execute their plans. If the plans don't work, we have options. We can go back, put Republicans in place, clear brush in Crawford and pray for divine guidance. As for me, I favor intellect over blind faith and unrelenting criticism of people that are trying like the devil to make things better.

    March 23, 2009 at 5:06 pm |
  5. Julie S,

    True, private investors need assurances that they won't be stung by retroactive legislation, though The New York Times did mention that Administration officials at least acknowledge that fact. I'm disgusted by the AIG mess, too, but it seems the media is serving as agitator here. Whether we can stay ticked off and move on at the same time is moot. At the very least, we know we need to move on. The stock market shows there's a little confidence hiding out there. Let's not scare those spirits from rising out the vasty deep.

    March 23, 2009 at 5:06 pm |
  6. Ahmed

    I believe the 497 (closing estimates) rally we saw in the DJI was investors being too happy without giving much thought to whether they would love to be any of these 'junk investors'. There are markets for other junk products besides financial junk but this will surely take some guts to take on because it is leverage on top of badly leveraged assets. Mr. Krugman's assessments are thus fair in light of this.

    However, nationalizing the banks will also require a clean up of some sorts and that will be difficult to achieve except the government is essentially wiling to absorb trillions of dollars in losses. That would eventually amount to a free pass for greed-led corporate failure. Geithner could under this plan effectively force banks to sell these assets at a favourable price to willing investors simply by using his bailout funds as leverage.

    March 23, 2009 at 5:04 pm |
  7. Ron

    Let me get this straight! We are going to buy the toxic assets from the banks and then lend the investors the money to buy them from the government?? Wow, where is all this money coming from?
    If these toxic assests had any real long term value, why the heck is all of this happening in the first place. Are we talking mainly about all the foreclosed, abandoned and sometimes wrecked houses? If they did not sell before, why would they sell at some much higher price now? And who would the buyers be – the same poor slobs who got into their "American dream" this last time? Unfortunately, I think the so-called lynch mob mentality will again prevail, from the American people who are fed up with this type of deal. And, If the investment goes bad, apparently the investor is only on the hook for the small portion that the government did not lend them? Sounds like a shell game to me, but if there is quick money to be made, the usual greed factor will prevail as it always does.

    March 23, 2009 at 5:04 pm |
  8. Deb Foster

    To Celeste Hammond – before you think we should have a National Health Insurance program – talk to people from countries that have this option. A lot of the people in Canada will come to the US to have their health needs taken care of. With a National Health Insurance program the doctors don't have the time to treat your illness, the waiting rooms are filled to the brim and by the time most illness' are dealt with it is too late. I am not just making this up I have heard from people who live in Canada, Germany and England. People have lost their lives waiting to be treated for their illness or disease. The only people who have good doctors are the people who have the money to pay for these doctors themselves. Check it out.

    March 23, 2009 at 5:02 pm |
  9. MICHAEL F. COKL

    why don't they tell us what they are going to do with the loans once they buy them. my guess is wait a while, then write them off as a loss and forgive the lier's that took out the loans debt and the crooks that looked the other way and made millions knowing the loans would fall apart. and we tax payer's will have to pay for the house next door and there new car, boat, vacation, education, etc. oh but wait, your house will stop losing value so you make out. (forget about the fact you are now paying for the lier's home too. just wait in a few years the $40k income family will be paying upward of 40% taxes and watching the neighbors head off the the lake with there ski boat in tow and putting it all on there credit card the tax payer are picking up the loss on. ha ha ha funny isn't it.

    March 23, 2009 at 4:59 pm |
  10. Don

    Hey Celeste, Europe already has socialism and so does Venezuela!!! WINX

    March 23, 2009 at 4:55 pm |
  11. ChristosK

    The essence of this plan is to create liquidity that does not currently exist becuase under normal circumstances, hedge investors and or opportunity funds would have purchased these assets and therefore, creatied a movement of bad assets off the books of the institutions that held them. This market efficiency does not currently exist and the only entity willing and to some extent able to be the investor is the government and by extension us. The government does not want to nationalize and is providing the debt to private investors to leverage up and buy these assets. I like this becuase the private investors will make sure they are buying the assets at risk adjusrted returns and also understand the mechanics of buying and selling them and re-pooling. In the end, the goals are to strengthen and stabilize the financial market/companies, create more good borrowing and protect the taxpayers by getting a reasonable retrun on their investment.

    March 23, 2009 at 4:54 pm |
  12. Marc T

    Cathie Holden March 23rd, 2009 1:34 pm ET
    Your point is one I've been making over the last week. The media frenzy that is occuring is horrible! EVERYTHING is negative. They bring on the biggest naysayers they can (I'm talking to YOU, CNN)... maybe only the most "conservative" (I call them irrational) Republicans are available for comment right now since centrists and Democrats are rolling up their sleeves trying to make this work. Krugman and others should help or shut up.

    Obama won the election. CNN needs to get that fact through their thick skulls! QUIT making him campaign day after day in rebuttal to the idiots that got us in this mess. How about a little support and intelligent reflection for a change?

    If I hear the words "Some are suggesting..." as your source one more time, I'm dropping CNN as my news source!

    March 23, 2009 at 4:50 pm |
  13. Johne Ebbe

    The plan will be successful if there is a mark to market reassessment of these mortgages. To me, and a large number of other middle class Americans, it makes more sense not to have to sell these assests for fire sale at noon prices, but have the flexibility to wait until the market prices rise and the taxpayers (granted some of the hedge fund cruds will make a pile too) can recoup the money spent. over a protracted period. Let's give the plan a chance because what was done before certainly failed. I would be interested to see if and how the private individual will be allowed to participate.

    March 23, 2009 at 4:50 pm |
  14. David

    Cathie...spot on! We need to give Obama's plans a chance...he is trying to clean up possibly the largest mess left by an outgoing president. A very large undertaking indeed, one that needs time.

    March 23, 2009 at 4:50 pm |
  15. kristen

    Scully, the US Airways pilot who landed the plane in the Hudson, said that he and his crew were able to remain calm through a pretty big problem by having a plan every step of the way. Yes, we will have to wait to see if the administration’s plan in assisting banks in unloading some of their toxic assets works. But at least it’s a plan and that just might help some of us sleep better.

    What's the latest on the appointment for deputy Treasury secretary? I haven't heard much on this of late. Geithner must be putting in some hefty hours at the office these days and would imagine he'd appreciate some help.

    March 23, 2009 at 4:48 pm |
  16. Aj Moore

    I think Mr.Geithner’s plan will work but I don't this they should rely on the bank to determine the price of the toxic assets. or better yet allow the bank to value them and then buy them at a certain percent but not at 100% since the bank (some of them) are already sitting on huge stock piles of bail out money. If the goverment and the fed does this and the bank start lending the massive amounts of money they have already gotten from the bail out then inflation will be a major problem. And let's remember banks generally don't lend when time are tough.

    March 23, 2009 at 4:48 pm |
  17. David

    Cindy,
    This plan has been "tried all over the world and it has NEVER worked"? When specifically? What countries, specifically? Do you have a better idea? Please tell...

    March 23, 2009 at 4:46 pm |
  18. Bob Steele

    The success of the new Geithner bank rescue plan is heavily dependent on establishing credible market value asset pricing of the millions of at risk mortgages and foreclosed properties. Here’s my question. Would it be possible and practical to set the value of the portfolio homes and properties at a modestly discounted prerecession/housing crash level – let’s say 90-percent of the June 1, 2007 property value?

    As President Obama has been emphasizing, all negotiating parties need to be willing to either take a haircut or pair their investment expectation. Rational compromise seems to me to be the necessary first step in restoring confidence and ending valuation uncertainty.

    March 23, 2009 at 4:46 pm |
  19. Luke

    I agree with Prof. Krugman. However, I 'hope' this plan works. If not, we're digging ourselves a deeper hole! Hmm...I'm wondering if the current hole has any limit.

    March 23, 2009 at 4:45 pm |
  20. Sandi

    I agree with setting limits on credit card and bank interest rates. When they became our modern day loan sharks we started falling into more financial trouble as a country. We ought to go back to simple interest, taken on the total amount borrowed...not compounded daily which then skyrockets loans to more than three times the original loan.

    As long as shareholders keep demanding huge profits this will not change...unless we legislate interest rates remaining simple, ie. 5% of the amount you borrow, repaid over time...and that's it. Borrow $ 100.00, repay $ 105.00.

    March 23, 2009 at 4:41 pm |
  21. martin

    Obama's is in control of our money,and i love it. Krugman is just another power player that has played out. He needs to Team up with Bush.

    March 23, 2009 at 4:40 pm |
  22. Mark J

    Thank god or should I say Obama for forging ahead.
    We will come out of this sooner.
    The Republicans would still be sitting on their hands.

    March 23, 2009 at 4:40 pm |
  23. Tom from Vienna

    Other than providing potential seed money to buy the toxic assets from the banks, there is still the question of who will decide the purchase price of those assets? And if the government/taxpayer is to receive their fare share of the potential profits of this transaction, then what actually removes the "toxic" from these toxic assets?

    In my amateur opinion, the only way to wrtie off the toxic amount to free up the banking system is for the government to offer to buy $100B of the assets at face value and re-sell them to the market at $95B. The government/taxpayers essentially writes down 5% of the bad CDO's and just takes that loss in the name of re-starting our economy. Any bank needing to clear bad assets has the onetime option to do so at that 5% rate (prevent multiple writedowns of the same asset).

    All of the political posturing by Congress and the new Administration is just wasting time and hurting the economy.

    March 23, 2009 at 4:38 pm |
  24. Scott Frasier

    It may not really matter whether it works. If it doesn't, Obama has failed to resolve the crisis. If it does, the reports of outsized gains by hedge funds will piss off the public. If it doesn't work and the hedge fund guys still make alot of money, Obama is toast. Unfortunately, I'm betting on the last possibility.

    March 23, 2009 at 4:37 pm |
  25. Gary

    If the asset truely have a value that would make it an exceptable investment. Then why should the current owner not reap the benifits-meaning the banks.

    March 23, 2009 at 4:36 pm |
  26. Len Smith

    At last leadership in the White House. Thank God.

    March 23, 2009 at 3:38 pm |
  27. Charles L. Shaw

    12.4 trillion Taxpayer dollars spent since 2007 in bailouts. This is certainly good for the wealthy, but this will certainly be the shackles of the people’s enslavement.

    March 23, 2009 at 2:57 pm |
  28. david

    Now what makes you think that Obama wants to do what's right for the nation?

    Nationlizing the banks is without a doubt, 100% the right thing to do.. it doesn't take very long to figure this out.

    but no one in washington will say this–they will simply put on a smile, lie about their motives, and continue to come up with these no good policies that benefit those who f'ed us in the first place.

    March 23, 2009 at 2:57 pm |
  29. Jim in Texas

    So history repeats itself, tried and tried again this time just larger scale...............didn't work in the past and will not work this time. Who's the bigger fool the ones selling the plan or the ones believing it.

    March 23, 2009 at 2:41 pm |
  30. Scott Brown

    All indications from the market today that many think this will in fact work.

    March 23, 2009 at 2:33 pm |
  31. John

    So what is the alternative? Has anyone come to the plate with Plan B?

    March 23, 2009 at 2:32 pm |
  32. Independent mind

    Hi respect David so much, but his analysis lately are somewhat misleading instead of lending a helping hand and giving constructive criticism

    March 23, 2009 at 2:32 pm |
  33. dee

    David,
    I enjoy politics and there are very few pundits out there that I truly respect. Throughout the campaign you exhibited such thoughtfull and profound insights not to mention your comforting calmness that allows people to trust you. You should run for president! no joke!

    March 23, 2009 at 2:31 pm |
  34. oldtimer

    Panic breeds stupidity and desperate measures.

    March 23, 2009 at 2:31 pm |
  35. J. Park

    Alas, I too have more confidence in Krugman than Geithner. But Obama will never bring him on, since Krugman is very anti-biofuels.

    After bashing people for borrowing 30 to 1, I wonder if Jon Stewart will attack this plan too, the Obama fan that he is.

    March 23, 2009 at 2:31 pm |
  36. Ryan Briles

    This is not the change that I voted for. This plan is only attempting to prop up a system that is dying. We can't put a band aid on this, and the band aid that they put forward in this plan is a bad one anyway. Look, people can recreate the red scare if they want to, but what we need is a government takeover of the banks. The financial health of this nation should not be put in private, irresponsible hands. I never voted for AIG or their bonuses.

    March 23, 2009 at 2:26 pm |
  37. Patty Harris

    NO – Obama's & his mob team trying to pull another visit to the kool-aids stand.
    Wake up folks before its to late.America is gone- welcome China.
    This group of crooks is scary.

    March 23, 2009 at 2:09 pm |
  38. mrsilver

    For the ill-informed, can someone please tell me the difference between a "toxic Asset" and a junk bond?

    March 23, 2009 at 2:09 pm |
  39. Steve Devin

    I'm an Engineer – not an Economist.... But every commentary that I have ever heard from Paul Krugman has always seemed right on – I think that he's probably right this time as well. I wish the President would bring him aboard his team.

    March 23, 2009 at 1:36 pm |
  40. Cathie Holden

    Yes, we all do have a stake in the outcome of this plan. It is not helpful however for the naysayers to continue with their rant. Krugman and others should park their egos at the door. Obama was elected, not Krugman. The media should be ashamed of themselves. They focus on the most pointless things. Obama got beat up for laughing on 60 minutes. Well he is right. People want to save the banks, they just don't want to spend the money. I am so turned off cable news that I don't know if I can stand one more day. AIG – bonus dollars – who gives a darn. No one complained about those bonus dollars when the market was soaring. Now it is Obama's budget will bankrupt the country. No one talks about the fact that Bush did not include the wars in his budget, but Obama does. The voters will decide if the Obama plan will work. They will do that on election day. It seems reasonable that the man be given a chance to succeed or fail.

    March 23, 2009 at 1:34 pm |
  41. C. Johnson

    Re:Geithner plan.
    Brilliant! Only one problem.Congress is more interested in posturing
    and blame than anything else.Scoring (in their OWN "minds") political
    points so that they can get re-elected Yes, the people ARE pissed,but
    Congress is only making matters worse,not better.

    March 23, 2009 at 1:32 pm |
  42. Jennifer H.

    I would offer a third question: If the majority perceive this a yet another government-supported mechanism that will end up lining the pockets of the already uber-wealthy private investors at tax-payers expense (and liability), how is this not just an Obama-sanctioned give-away to people who are presumably his wealthy supporters, and that's if it actually works? The appearance of this as being a back-room deal with little transparency and a select few who make out is not doing Obama any good, not now and not in the next election.

    March 23, 2009 at 1:21 pm |
  43. celeste Hammond

    I agree with krugman that we should move to nationalize the banks, but too many Republicans and others fear this, l ike they use to (and some still do) fear a National Health insurance program. So Dumb! On the other hand since the buyers stand to make possible of piles of money, I think Gertniers Plan will suceed due to the proven Greed of so many Americans. I just wish everyone would get out of Obama's way and stop blocking and critisizing him and let him work the Magic that we know he can do, which is why we elected him in the first place. I can walk and chew gum at the same time too!

    March 23, 2009 at 1:17 pm |
  44. Randy

    Now let's help the little guy and say no more than 9.9% interest on credit cards. They need to do something for the people paying for their mess and raising interest rates is always their quick fix

    March 23, 2009 at 1:15 pm |
  45. Eli, Oklahoma

    Here we go again. Another "Plan" to make a select few wealthy.

    March 23, 2009 at 1:08 pm |
  46. Bill in Houston

    Excellent analysis as usual. I really enjoy reading and listening to David he has superior insight.

    March 23, 2009 at 1:07 pm |
  47. Melissa

    Simple... no one knows.

    March 23, 2009 at 12:21 pm |
  48. Michael "C" Lorton, VA

    This is absolutely insane--the only ones who will benefit are the stakeholders of the toxic assets-–when you purchase garbage--it garbage-–and to think that you can change garbage into gold--you can--but only when you disposed of it.

    March 23, 2009 at 12:17 pm |
  49. Annie Kate

    I would think a long time before I invested in something termed a "toxic asset". Just the name is off-putting.

    March 23, 2009 at 11:58 am |
  50. Cindy

    Geithner's plan has been tried all over the world many times and it has NEVER worked. So what's the difference now? Like you said we'll have to wait and see. But I won't be holding my breath that it will.

    Cindy..Ga.

    March 23, 2009 at 11:55 am |
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