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March 30, 2009
Geithner’s Plan is Good for America
If both economist Paul Krugman and Rep. Eric Cantor (R-VA) are criticizing the Geithner plan to buy so-called toxic-assets, it just may be that our Treasury Secretary has it right. Despite the criticism, the proposed plan solves two major problems: it will establish market-based prices on assets for which there are currently no buyers and it should attract the private sector to buy these assets by the truckload, thereby removing these assets from bank balance sheets.
The plan is of enormous importance. It resolves the ethical problem of determining the prices at which these assets will sell, an important feature previous plans lacked. The initial 497-point jump in the Dow certainly says The Street liked it. No wonder. It is pretty close to “free money.” Geithner’s plan is attractive enough to lure investors off of the sidelines, giving the economy a chance to recover. He had to make it very, very, good, and he did exactly what was called for.
One would hope, however, that once the market starts to open up, the amount of low-cost debt and leverage provided by the government will be reduced. That would save us, the taxpayers, 10s if not 100s of billions of dollars as well as make the bidding process for assets more efficient—itself an additional tool for reducing risk to the taxpayers.
The job is not done. This is a great start—a huge accomplishment—but it screams for ongoing monitoring and modification by the Treasury to better balance the risks for all parties while keeping the market for these assets open and active. With 93% low-cost, non-recourse leverage there is plenty of room for this program to start as “free money” and evolve into merely a very, very good investment opportunity. I commend Secretary Geithner. So far, so good.

Robert Sheridan is the Principal and CEO of Robert Sheridan & Partners.


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