BLOG VIEW: The Overlooked Merits Of The Geithner Plan

Written by Jessica Lillian
on February 19, 2009 No Comments
Categories : Blog View

Before we fully shift the policy spotlight to President Obama's recently unveiled Homeowner Affordability and Stability Plan, the finance industry – particularly commercial mortgage professionals – should take a second glance at some of the initiatives outlined in the Treasury's eagerly anticipated Financial Stability Plan (also known as TARP, Take Two.)

The rescue plan, which was announced by Treasury Secretary Timothy Geithner last week and was met with a resounding chorus of boos from economists, commentators and industry participants alike, clearly failed to inspire widespread confidence – as evidenced by the stock market's immediate reactive slide. As you read earlier in recent MortgageOrb Blog Views (here and here) Geithner's blueprint is not without notable shortcomings.

At the same time, however, I wonder whether certain promising elements of the plan that should be warmly welcomed are instead being buried under this enormous crush of criticism – which may very well be partially undeserved in the first place. Â

‘Surely, by now, it should be clear that with respect to the big issues, there are no easy answers, no silver bullets,’ writes James B. Stewart in a recent Wall Street Journal SmartMoney.com column (fittingly titled ‘Why Geithner Bashing Has Gone Too Far’). ‘To think otherwise is simply wishful thinking, and to hold Geithner responsible for failing to supply it is unreasonable,’ he says. Exactly.

So, we have established that the Financial Stability Plan does not supply immediate, convenient answers to all of our financial woes (although, as Stewart notes, the official fact sheet on the Treasury Web site does contain information that is significantly more thorough and compelling than the rather tentative version described in Geithner's speech). What does this financial life raft offer, then?

First, the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF), originally designed to support the issuance of securities collateralized by consumer loans, will be increased to a maximum of $1 trillion and expanded to include commercial mortgage-backed securities (CMBS). TALF purchases will be limited to newly packaged AAA-rated loans in order to ‘best protect against taxpayer losses and efficiently leverage taxpayer money to support a large flow of credit,’ the fact sheet notes.

If the critical CMBS inclusion is successfully implemented to the point of resuscitating the CMBS market and restarting normalized commercial loan origination activity (and that ‘if’ is, admittedly, a sizeable ‘if’), then the rattled commercial mortgage industry might be ready to begin celebrating.

For now, the sector can at least record a quiet, solid victory. After all, Commercial Mortgage Securities Association (CMSA), the Mortgage Bankers Association and other prominent industry groups have repeatedly lobbied for this crucial measure.

‘Noting that the commercial real estate market has ceased to function with respect to new issuance and existing bonds continue to trade at highly excessive spreads, CMSA emphasized to lawmakers than an expansion of TALF purchases of commercial mortgage securities would, if successful, spur market activity,’ CMSA explained in its recent statement of support for Geithner's plan.

Moreover, as discussed on MortgageOrb last month, it goes without saying that a healthier commercial mortgage lending world – or even just an evasion of the full-on commercial real estate crisis many analysts have predicted for this year – goes a long way toward creating some semblance of broader financial stability.

John Courson, the MBA's president and CEO, called the Treasury plan – particularly CMBS' newly issued key to the TALF – a ‘significant step forward in the effort to restore confidence in our financial institutions.’ He further suggested that opening the TALF doors even further – namely, to include private-label residential mortgage-backed securities (RMBS) – might give the program an additional boost. Indeed, the Treasury's fact sheet notes arrangements for continued consultation with the Fed on potentially bringing RMBS into the fold.

In the meantime, other major components of the Financial Stability Plan – including forward-looking stress tests for financial institutions, subsequent capital buffers as contingent equity (in the form of convertible securities), a public-private investment fund and a heightened emphasis on accountability and monitoring – also deserve at least brief consideration that they may be useful and, perhaps, even successful.

As Stewart notes in his column, the capital-buffer approach goes significantly further than the Treasury's earlier efforts and could possibly result in government ownership of certain financial institutions. ‘But this doesn't mean wholesale nationalization of the banking industry, as the indiscriminate sell-off in bank stocks might suggest,’ he writes. ‘It simply recognizes that some institutions are so weak that the only measure is to wipe out their shareholders, replace management, liquidate them, or recapitalize them and return them with healthy balance sheets to private ownership.’

Could such a strategy actually achieve a beneficial financial cleansing? What about the rest of the Treasury's rescue blueprint? Please send your thoughts on the plan's redeeming possibilities – or glaring flaws -Â to lillianj@cmi-online.com.

– Jessica Lillian, Commercial Mortgage Insight

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