David Brooks’ column today reads like a therapy session for Treasury Secretary Tim Geithner. It seems there are lots of monsters lurking in Geithner’s nightmares, and the scariest for him — and for us — is that after struggling with the financial crisis for more than a year, neither Geithner nor the Masters around him are sure how to solve it.

Here’s the scary situation as I understand it, and what has to happen:

1. Major banks that are effectively bankrupt (actual value of bad assets is less than value of liabilities) have to have those bad assets removed/written off from the balance sheets.

2. Those assets have to be held by some entity until they can be sold off for whatever salvage value the holder can get, to minimize losses for the holder (that’s probably US).

3. Then the remaining bank needs to be restructured (by whom?) and recapitalized before it can begin to function as normal.

4. Restrictions have to be imposed to prevent worse decisions while all this is taking place

5. Which of the banks beneficiaries take a hit?

So it’s interesting to see what Geithner reveals to Brooks on these questions.

Some economists leave the impression that the banking sector is a rotting corpse, hopelessly polluted by valueless toxic assets. Geithner takes a different view. He agrees that many bankers did things that are “reprehensible and deeply troubling.” But the big uncertainty is not inside the banks; it’s in the broader economic climate.

“People are enormously uncertain about the depth of the recession,” Geithner says. “They’re enormously uncertain” about how their assets will perform in this environment. But this is not like the savings-and-loan crisis of the ’80s and ’90s, or like Sweden, where banks themselves were dead, he said, adding that we’re trying to repair “a system that is largely alive and will largely survive but is still burdened by systemic market failure, systemic uncertainty.”

Therefore, Geithner argues, the government doesn’t need to go in and nationalize the banks. “It’s very important that we don’t look like there’s any intent of taking over or managing banks. Governments are terrible managers of bad assets. There’s no good history of governments doing that well.”

Marcy noted how this argument is calculated to make nationalization, or federally imposed restructuring, unwise:

1) The banks are not dead (argued with no supporting evidence)

2) Therefore, the Sweden model, in which a govt was a very skilled manager of bad assets, is not necessary

3) We can’t nationalize the banks because govts are terrible managers of bad assets, and besides, that would just lead to a "reign of terror" (Brooks’ terms).

Geithner is looking to the markets to value the assets (which they haven’t done), getting the market (through incentives) to take the assets (which they haven’t done), and reassuring the market that he won’t wipe out management, shareholders or other creditors.

“If you’re pricing a guarantee or pricing a purchase, you have the same basic problem: the absence of a market price,” he said. It’s better to create a market so prices can be set normally, not by fiat. You end up with a program that is big but reassuring to markets — more a partnership than a confrontation.

This is all reassuring, unless, of course, you’re the taxpayers. And maybe this explains today’s NYT article leaking how Geithner saved the banks from those in the WH who would have imposed more stringent conditions.



John has been writing for Firedoglake since 2006 or so, on whatever interests him. He has a law degree, worked as legal counsel and energy policy adviser for a state energy agency for 20 years and then as a consultant on electricity systems and markets. He's now retired, living in Massachusetts.

You can follow John on twitter: @JohnChandley