Geithner Fucking up Perfectly Good Commercial Realestate Shorts

March 29: Geithner, McCain - Meet the Press, online at MSNBC- msnbc.com

updated 11:58 a.m. ET, Sun., March. 29, 2009

MR. DAVID GREGORY: Our issues this Sunday: Crisis management at the White House.

(Videotape)

PRES. BARACK OBAMA: It took many years and many failures to lead us here, and it will take many months and many different solutions to lead us out.
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(End videotape)

MR. GREGORY: At the height of a global recession, the administration unveils a detailed plan to shore up the country's financial system and get the banks lending again.

(Videotape)

SEC'Y TIMOTHY GEITHNER: To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game.

(End videotape)

MR. GREGORY: With us this morning, in his first live Sunday morning interview, the man at the helm of the administration's efforts to combat the recession and save the banking system, the secretary of the Treasury, Timothy Geithner.

Then, a leading Republican voice in the Senate, the GOP's presidential candidate in 2008 and their ranking member of the Senate Armed Services Committee, Senator John McCain of Arizona. What does President Obama's former opponent think of the bank rescue plan and the president's new strategy in Afghanistan? We'll ask him in an exclusive interview. Geithner and McCain, only on MEET THE PRESS.

But first, here live is Treasury Secretary Timothy Geithner.

Welcome to MEET THE PRESS.

SEC'Y GEITHNER: Thank you, David. Good to be here.

MR. GREGORY: Thank you. I want to start with some basic terms here. Can you explain as simply as you can why increasing bank lending is so important to the economy?

SEC'Y GEITHNER: Absolutely, David. Economies require banks because they require credit. Credit is like the blood, it's like the oxygen of any economy. And for us to get the economy growing again, we need to make sure there's going to be credit available to businesses and families across the country so that businesses can meet payroll, so that they can expand, so that families can put their kids through college, can borrow to finance purchase of a car or a new house. That's, that's why financial systems matter, and there is now way to get this economy back on track unless we have a financial system that's working with the recovery rather than against recovery.

MR. GREGORY: My mother out in California, I presume, is watching this morning. She's like a lot of Americans, worried about her job and wondering why not just bank lending, but something called nonbank lending, securitization--what is that, and why does that matter to her?

SEC'Y GEITHNER: We, we came through a period where people borrowed too much and we let our financial system take on much too much risk. And the consequences of those choices, made over years, were--was a huge boom. And that boom--the air is now coming out of that, and that's causing enormous damage. And financial crises are, are brutally indiscriminate in the pain they--and suffering they cause. The burden falls not just on people who took too much risk, but on people who were careful and responsible in their business. That's why it's so unfair. That's why Americans are so frustrated and angry And that's why it's so important that your government act very aggressively to help contain the damage.

MR. GREGORY: But I want to go back to what--I want to understand the terms here. What is securitization, and why does that matter?

SEC'Y GEITHNER: In our system we have banks--community banks, large banks, small banks--that provide credit to businesses and families. But in our markets we also have these securitization markets where--which, which match investors directly with borrowers through the capital markets. We need both those to work. Both are not doing enough now. They're not working, doing the kind of job they need to do to get credit going again. And so to fix this mess we're in, the mess we inherited, need to make sure banks are strong enough...

MR. GREGORY: Right.

SEC'Y GEITHNER: ...but we also need to make sure these credit markets are working again.

MR. GREGORY: And let me--on that point, on the nonbank lending, the securitization market is where actually most of the lending goes on right now. Is that right?

SEC'Y GEITHNER: Well, well, typically in, in our financial system, somewhat less than half of lending for businesses and consumers comes from those markets. So we need to get those markets going again just as we need to fix our banking system. And the programs we put in place are already having some effect in helping unfreeze those markets. So just as an example, last week the Fed announced--the Fed put in place a program with the Treasury, very powerful program that led to about $9 billion in new issuance of automobile loans and credit card loans. That was more than you saw in the past four months combined.

MR. GREGORY: Mm-hmm.

SEC'Y GEITHNER: That will help bring down interest rates and, again, make it easier for people to get access to the credit they need to get through this.

MR. GREGORY: All right, we've defined our terms a little bit, now let's talk about the big news this week, your plan to help save the banks. The bank stabilization plan. We've come up with an example here and we'll role-play a little bit, because I think this is the easiest way to explain this. So here's how a transaction would work. Bank USA, we're calling it, has a loan, a toxic asset, and it's valued on their books for $100 million. And it's for sale, right? So there's going to be an auction here and investors like me could come in, and I'm going to come in and I've got--my highest bid is for $70 million, OK? That's the price for the $100 million loan that I'm actually going to pay. Now, here's how the transaction actually works, right? I'm the investor, I put in $5 million. You, the Treasury Department--you're really the taxpayer--put in $5 million, and then the government in the form of the FDIC is going to provide 60 million at very good terms, going to guarantee that loan. So the government's on a hook for a lot of this. That's called leverage, right? How does it work and what's the upside?

SEC'Y GEITHNER: David, let me just step back for one second. Part of what's, what's causing this problem in our financial system is banks made a bunch of bad loans, many of them backed by real estate; residential, commercial real estate. Those loans are now sitting on the books of the financial system and they're taking up room, preventing banks from extending new credit on the scale they need. And we have two choices in this context. We can leave it as it is, hope banks will earn their way out of this process over time, and I am certain that will create the risk of a deeper, longer recession. Again, the classic lesson in financial crises, if governments wait to act, they wait too late and that means more damage to the economy, higher deficit in the future, greater cost to the taxpayer. We're not prepared to take that approach.

Another approach many people advocate is that the government itself come in...

MR. GREGORY: Right.

SEC'Y GEITHNER: ...and buy these assets, take on all the risk itself. The government would set a price for the assets and bear all the losses and all the costs in that context. Our judgment is that would be much more expensive for the taxpayer, create much greater risk for the taxpayer, and we're not prepared to take that approach.

MR. GREGORY: And the point in our model, if we can just put that slide up again, where you see investor puts in five million, Treasury puts in five million, the FDIC guarantees it at $60 million in terms of providing the loan. There's upside there. In other words, if the value of that loan goes up, the taxpayer wins, the investor wins.

SEC'Y GEITHNER: Right. The investors are taking risk. Their money is at risk and at stake. They're the ones that set the price for which this transactions will take place. So using their self-interest to get the price better, better than what the government would do in that context.

MR. GREGORY: Right.

SEC'Y GEITHNER: We're using their expertise to help manage these assets. And the--and as you said, the taxpayer will share in the upside. This is a relatively conservative structure. It's not very different from when your family buys a house. It's a more conservative structure than a bank typically operates. But the key thing is it allows the government to work with the private investor to help get through this crisis.

MR. GREGORY: Hm.

SEC'Y GEITHNER: That we don't want the government taking on all the risk and all the losses.

MR. GREGORY: Right.

SEC'Y GEITHNER: We need to work with the private sector to help get this, get this recovery going again.

MR. GREGORY: All right, but here's the key point. The investor presumably is on board because, you know, they stand to gain a lot. The government wants to get all of these toxic assets off the banks' balance sheets. It's been estimated between $1.5 and $3 trillion of bad stuff out there. But will the banks participate? And here's my question based on our example. Hundred million dollar loan, but the auction price is $70 million. Well, if you're the bank and you say, 'Hey, wait a minute. This is really worth $90 million or $80 million. I'm not going to sell that for $70 million and take that loss on my books.' Are you going make them sell?

SEC'Y GEITHNER: Banks already hold reserves against that $100 million. So the gap is not between 100 and 70, for example, it's a narrower gap. Now, banks are going to have an incentive because they want to raise, go raise private capital from the markets. And it's going to be easier for them to do that if they can show their investors a cleaner balance sheet. And that'll help improve the incentive for banks to participate.

MR. GREGORY: But you can't make them sell, can you?

SEC'Y GEITHNER: Well, you can make it compelling and economic for them to sell. And again, if you think about the markets today, if you had to sell your house tomorrow, in a market where no one can get a mortgage, then the price you would get if you sold in that market would be a tiny fraction of its basic value in a more normal. And our markets are not working today. People, in effect, in these securities markets, can't raise financing. And there is a very good case in that context for the government to provide financing on appropriate terms to help provide a market for these assets. And by doing that, we're going to make it more likely that interest rates come down and, and the financial system has the capacity to provide the credit, the oxygen.

MR. GREGORY: Mm-hmm.

SEC'Y GEITHNER: That economies need to grow.

MR. GREGORY: Isn't the government on the hook here for a lot of risk? Isn't there a lot more risk here for the government than there is for that investor?

SEC'Y GEITHNER: David, the choice we face is whether to have the government take on all the risk in solving this, which we don't want to do. So if you compare this to the classic alternative, which is again, the government sits back, hopes the market solves this, which would be much more damaging to the economy, or the government takes on all the risk, buys all the assets itself, makes up a price, would risk overpaying, provide a much greater subsidy, this proposal is a much better approach to solving this problem.

MR. GREGORY: Paul Krugman, Nobel laureate, New York Times columnist, been very critical of this plan. He and others have said this is effectively a transfer of wealth from the banks' balance sheets to the government's balance sheets. A bailout for the banks, trash for cash. You've heard all of these terms. And in fact, Krugman writes in a column last Sunday that your approach is very similar to your predecessor's in the Bush administration, Hank Paulson. This is what he writes. I want to have you respond to it: 'The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks' books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn't be in trouble. And so the plan is to use taxpayer funds to drive the prices of bad assets up to `fair' levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. ... The Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down,' and again, these are all mortgage backed, 'the investors can walk away from their debt. So this isn't really about letting markets work. It's just an indirect, disguised way to subsidize purchases of bad assets.' Respond, please.