Let the Markets Work, Please.

Why Markets Dissed the Geithner Plan

WSJ 2-11-09 By ANDY KESSLER

One of the cool things about being Treasury Secretary is that you get your signature on dollar bills, giving them authority, defending their honor. Timothy Geithner's plan to save the struggling banking system probably does the opposite, throwing good money after bad to a banking system struggling under the weight of its own mistakes. The markets don't like it. The Dow dropped 382 points while bonds rallied as a port in a continuing storm. Read the full article here.

As Mr. Kessler points out, the market is telling us what Citi and BOA are worth. Just who is it that thinks they're so smart and wise to say the market's valuation is wrong? Mr. Geithner? Give us a break; he evidently couldn't figure out how to use Turbo Tax.

Mr. Kessler goes on to propose an attractive plan that lets the market work.

Mr. Geithner should instead use his "stress test" and nationalize the dead banks via the FDIC -- but only for a day or so.

First, strip out all the toxic assets and put them into a holding tank inside the Treasury. Then inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here's the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately.

Some $6 trillion in income taxes were paid by individuals in 2006, 2007 and 2008. On a pro-forma basis, send out those 10 billion shares of each bank to taxpayers. They paid for the recapitalization.

Each taxpayer would get about $100 worth of stock for each $1,000 of taxes paid. Of course, each taxpayer has the ability to sell these shares on the open market, maybe at $40, maybe $20, maybe $80. It depends on management, their vision, how much additional capital they are willing to raise, the dividend they declare, etc. Meanwhile, the toxic assets sitting inside the Treasury will have residual value and the proceeds from their eventual sale, I believe, will more than offset the capital injected. That would benefit all citizens, not the managements and shareholders who blew up the banking system in the first place.

Of course, banks and politicians won't like this plan. Banks won't like it because it would force the pain and costs of their bad decisions on current bank managers and shareholders. Politicians won't like it because it would make it clear that politicians can't remove the pain and costs of the bad decisions and because politicians need to appear to be "doing something." Politicians also want control. Markets give control to the people.

Let the markets work, please. The longer we do not let the markets work, the longer we will continue to waddle about in recession and stagnation.