Geithner's Gamble Needs Speculators By PETER EAVIS
As last throws of the dice go, this is midnight at the craps table for Timothy Geithner.
On Monday the Treasury secretary laid out plans aimed at cleaning up bank balance sheets and resurrecting the securitization market, which once helped credit flow through the economy.
The Treasury wants to persuade private investors to buy loans and asset-backed securities. It aims to do that by using dwindling Troubled Asset Relief Program dollars to invest in such assets alongside private investors.
The government will also provide and guarantee cheap loans so returns on these assets can be magnified with leverage.
This all will be done through public-private investment funds and through the expansion of the Federal Reserve's Term Asset-Backed Securities Loan Facility.
The Treasury envisions $100 billion of equity being levered up to buy $500 billion of assets, and maybe as much as $1 trillion over time. The financing will come from government-guaranteed debt issued by the funds and from the Fed.
The first risk: Treasury may be trying to revive segments of the securitization market that only existed because of years of easy money, not because their practices and economics were sound.
As a result, when the government stops lending, the prices of leveraged assets could plunge. Knowing this, it might be hard to generate sustained buying.
Take securities and loans backed by commercial real estate. These have plunged in price, as investors fear issuers will find it hard to refinance this debt when it comes due.
And the numbers aren't small: Some $814 billion of these bonds and loans are set to mature from 2009 to 2011, according to Foresight Analytics.
If this market is merely experiencing a shortfall in confidence and liquidity, the Treasury's latest moves may work.
But if the underlying properties are worth much less today, the government is engaged in a game of price support it can't ultimately win.
This also applies to Treasury's aim for banks to use the schemes to sell off tainted assets. Investors, even with leverage provided by the government, will likely bid for assets well below what banks are willing to sell at.
After all, investors need to build in a big margin of error given that the range of estimated losses on bank assets is enormous. CreditSights projects collective losses of the four biggest U.S. banks through the end of next year could be anywhere from $250 billion to $450 billion.
Granted, the Treasury can fill any holes on bank balance sheets resulting from losses on asset sales with equity injections from the TARP. But it isn't clear there are enough TARP funds to do that on a big scale.
Mr. Geithner really has gone all in.