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For the Dollar the Geithner Plan Offers More Questions Than Answers

Last updated 3/23/2009 3:53 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Details of the Geithner plan have been leaked to the press and according to the New York Times they are comprised of three key proposals. “The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.  In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money. In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.”

Although Treasury Secretary Geithner is expected to offer further clarification of the new proposal later today, at first glance the Gaithner plan appears to be simply a more convoluted variant of the Paulson plan which relies on the underlying and rather questionable assumption that the value of the toxic debt on the bank’s balance sheets is actually worth more than the current market price.

The Geithner proposal seeks to entice private investors with massive subsidies. The Times notes, that “the F.D.I.C. will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent. “

Given the outrage over the AIG bonuses we wonder if the Obama administration will have the political power to pass a plan that offers such generous terms to private investors. Furthermore, the deeper questions  is whether private investors will participate in the plan or will they fear the confiscatory legislation by Congress should these deals turn wildly profitable? Finally as several commentators  have already pointed out , the Administration’s  assertion that “The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets”,  flies in the face of reason as it clearly suggests that taxpayers will be paying more not less for these assets as the result of the auction and  will therefore be subject to greater risk and smaller reward under the plan’s proposed structure.

The currency market will likely wait until Mr. Geithner  provides further details at the press conference later today, before forming the final opinion,  however the initial reaction has been skeptical and dollar bearish with EUR/USD climbing above 1.3700 by early European trade.  If upon hearing the full details of the plan the market concludes that the Geithner proposal is simply another case of throwing good money after bad the greenback could see further selling pressure as the day progresses.

 Geithner's Toxic Asset Plan

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.