Time calls Geithner a con-man: Stress Tested -- Has Geithner's Bank Confidence Game Worked?
By Massimo Calabresi / Washington Friday, May. 08, 2009 / Nicholas Kamm / AFP / Getty

Treasury Secretary Timothy Geithner

From his earliest days as Treasury Secretary, Tim Geithner's biggest challenge has
been restoring confidence in America's fragilebanks without taking the politically costly
step of asking Congress formore money. To judge by the results of the government-run
stress testsreleased Thursday afternoon, Geithner has somehow pulled it off — at
least for now.

Not that three months of supervisory scrutiny of the country's top 19
banks hasn't produced some grim news. If the economy dropped to
Depression-era levels of unemployment and credit shrinkage, according
to the Treasury and the Federal Reserve, those firms could lose nearly
$600 billion by the end of 2010, on top of the $350 billion they've
already lost since mid-2007. Bank of America needs nearly $33.9 billion
in new capital, Wells Fargo needs $13.7 billion and Citigroup needs
$5.5 billion. Altogether, 10 of the top 19 need $74.6 billion in
additional capital.

But in a remarkable bit of salesmanship, Geithner has managed to
package those findings as positive. Most of the banks can meet or beat
the newly imposed government capital requirements on their own, either
by selling off parts of their business, converting loans into stock or
participating in the fledgling government-led effort to get toxic assets
off their balance sheets. And those that are short on cash won't
need more in total than the $110 billion to $135 billion the Treasury
still has from the original $700 billion in TARP funds that Congress gave
the Bush Administration for bank rescues last fall.

"There is a reassurance in clarity," Geithner said at a briefing on
Thursday.

Those revelations were greeted on Capitol Hill with stunned silence by
Republicans and barely suppressed joy by Democrats. "I believe that
many of [the banks] will be able to meet their capital needs, without
further government capital," Federal Reserve Chairman Ben Bernanke told
the Joint Economic Committee on Wednesday. Further, he said,
Administration officials "don't think there's a near-term need" for
more money from Congress. "That would be terrific!" chirped the
committee's Democratic chair, Carolyn Maloney, of New York.

The news, leaking out over the course of several days, likewise lifted
the markets, sending bank stocks up dramatically for the week by close
of business Thursday. And for all the grim numbers, the banks
themselves were touting the results, too. "The regulators demonstrated
that the industry is strong now and, should conditions worsen, will
only need minimal capital to remain strong," says Scott Talbott, a top
lobbyist for the banks.

So three months after he rolled out his bank-rescue plan to disastrous
reviews, Geithner, with help from Ben Bernanke and others, has
bolstered the confidence of the banks, Congress, the stock market and
much of the country. In an economy that runs on credit, that's half the
battle.

But it's not all of it. Facts are important too, and some think
Geithner and the government are fudging them. Nouriel Roubini, the
hard-headed pessimist who foresaw the financial crisis, wrote Tuesday
in the Wall Street Journal that the overall positive message of the
stress tests "would be good news if it were credible," but it's not. He
points to the recent IMF report that estimated $2.7 trillion in U.S.
loan and security losses, and his own estimate of $3.6 trillion for the
same potential losses. "The financial system is currently near
insolvency," he concluded. Bernanke disputes the numbers, saying banks
have "taken significant write-downs, they have reserves and there are
substantial earning capacities." But Roubini is not alone in
questioning whether the government used appropriately pessimistic
assumptions in conducting the stress tests, especially as the financial
sector faces a potential flood of commercial real estate losses that
could mirror the residential market's recent woes.

Still, even if the numbers are based more on positive thinking than
cold hard facts, it's tough not to be impressed by what Geithner and
company have accomplished. In addition to the boost in public
confidence, they've apparently figured out how to get the banks to
support Geithner's other iffy program, the one designed to rid banks of
toxic assets. Until now, banks have resisted selling the highly
securitized, largely illiquid toxic assets, arguing they're worth more
than the current fire-sale prices being offered on the open market. But
taking them off the banks' books is key to restarting lending, and the
stress tests' mandate to boost capital may be enough to get the process
started.

The Treasury has given the troubled banks until June 8 to decide how to
raise that capital, and until November to do so. Just by chance, early
June is right around the time the Treasury expects big-time fund
managers to have come up with the $500 million they need to leverage
government subsidies to purchase the toxic assets on the cheap.

All of which goes to show that whatever his faults, Tim Geithner knows
how to game America's confidence in the banking system. But does that
mean the stress tests themselves are one big confidence game? Perhaps.

The playwright David Mamet said such scams get their name not from the
confidence the victim places in the con man, but the trust the con man
pretends to place in the victim to elicit trust in return. By that standard,
Geithner may be the most effective con man around, for better and for
worse.

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