Currencies Sell Off as Geithner's Super TARP Disappoints

Last updated 2/10/2009 11:48 AM ET (GMT -5) 0 Comments - Add your comment

Kathy Lien

Director of Currency Research, GFT

Treasury Secretary Tim Geithner laid out the Obama Administration's game plan for restoring stability in the financial markets. Unfortunately the price action in the currency markets suggests that investors are disappointed by the lack of details and are skeptical about the effectiveness of getting the private sector involved. Furthermore, investors are not happy about being apart of an experiment. Geithner has announced a cocktail of initiatives using "things we haven't tried before" and warned "that we will make mistakes." If the Treasury Secretary is not 100 percent confident in his own plan, how could investors be? Traders have plowed right back into the US dollar on the fear that the US government is rolling the dice once again. Equities have also fallen as much as 300 points.

The Treasury's Super TARP plan, which is now renamed as the Financial Stability Plan has 3 core components:

1. More Capital for Healthy Banks

3. Public Financing for Private Investors Willing to Buy Distressed Debt (details of private/public investment fund have not been released)

These measures will be built on the Term Asset Backed Securities Loan Facility and the program will be expanded to include student, credit card and home loans. The toxic asset investment fund will start at $500B and may grow to $1 trillion, but the structure for this program has yet to determined as the Treasury seeks input from the market and the public on how to design it.

The plan also includes the following:

A comprehensive housing program aimed at bringing down mortgage rates and reducing mortgage rates is still in the works and will be announced in the next few weeks.

The Treasury's focus is to get banks lending again - According to Geithner, "The financial system is working against recovery and that's the dangerous dynamic we need to change." “In our financial system, 40 percent of consumer lending has historically been available because people buy loans, put them together and sell them. Because this vital source of lending has frozen up, no plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses -- large and small.”

The reason why critics have crushed any optimism is because Geithner is getting the private sector involved in a "comprehensive strategy (that) will cost money, involve risk, and take time.” The Treasury's game plan has failed to reinvigorate confidence in the financial markets, sending investors back into the safety of the US dollar and Japanese Yen.

The action from Washington is not over. Federal Reserve Chairman Ben Bernanke will be testifying on the Fed Programs and the Financial Crisis to the House at 1pm ET. He will be asked questions related to the central bank’s lending programs and may discuss the Fed’s openness to buying long term Treasuries. The central bank is split on how to alleviate the credit crisis and not every member is in support of buying Treasuries. The Federal Reserve will also play a big role in the Treasury’s Financial Rescue and the specifics may be critiqued and questioned by the House as well.

Geithner will be testifying again at 2:30pm ET on oversight for the TARP and the US Senate is expected to vote on the stimulus plan sometime today.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.