More than anything, the market wants details on the troubled asset plan. We have waited too long. Many astute fund managers and traders see the treatment of these "toxic assets", now renamed as "legacy assets" as the root of the problem.
If a trader wants to be on the right side of the market, this is the key issue to understand.
Geithner Round One
Many question why President Obama did not have a plan in mind, ready to announce on Day One. We did our best, with our letter to the President. We explained the most important step he needed to take.
But we understand. From a Presidential perspective, it is not all about the markets, even though that demanding girl friend thinks so.
The result: Geithner was in charge. Geithner is uncomfortable with a relaxation of mark-to-market accounting rules, the easiest, best, and most immediate solution. Geithner had a personal tax problem, so he was distracted for a week or so while getting confirmed. The cost of the delay to the country was a big multiple of his understated taxes -- 10,000 times? Hmm. It would also have taken time to find a replacement, who would have been starting from scratch.
When he made the rounds of actual financial experts, including both those who hold these assets and those who might buy them, he realized that his initial plan would not work. Those holding performing assets are not going to sell them at fire-sale prices. Potential buyers are looking for a bargain.
Suddenly, he realized what most of us already knew. There was a real problem related to market-based price discovery.
Why the Foul Up?
Many of my colleagues question the delay in the troubled asset plan. They do not realize how difficult it is for a new Administration to take the reins.
They also blame Geithner for leaks and trial balloons. This was classroom material back in the old days. One does not send up a trial balloon without a specific plan in mind. We believe the leaks came from the private experts who were consulted, a much more likely source.
It is of little consequence. The verdict was that the original "bad bank" idea was not going to work. When Geithner gave his much-heralded speech, it was merely an outline.
This is the biggest blunder of the Obama Administration. While he is doing well with his general audience, the market observers are an important constituency. We wonder what Larry Summers, super-intelligent and market-savvy, is doing. Does he not have enough power? Nearly anyone with a knowledge of markets could have saved retirement account holders trillions of dollars.
The Obama error lies in not understanding this, and in staffing mistakes.
The market error is expecting the wrong thing. Presidents do not typically view the stock market as the prime audience. This is an exceptional time.
It is a source of tension.
Choosing an Audience
The President, quelle suprise!, thinks he is speaking to the audience in front of him, and to the American people.
The market expects every speech to be a detailed outline of a financial plan.
That is the dilemma. People who have no experience in interpreting political events are stepping forward as instant critics. The President is not going to provide such a plan in a speech that is like a State of the Union Address.
Today's Selling
The market sold off over 1% in the last few minutes of trading. The news was out that the President would emerge from a meeting with Geithner and make some remarks.
It was a photo op! Some legislative leaders and the economic team made some sweeping statements about regulation. It was obvious. It was not a forum for an announcement. The market did not "hate Obama". It was disappointed at (yet another) failure to deliver anticipated information.
On this foolish information, we have trillions of dollars of market cap swinging each day.
Geithner Round Two
Expectations are now so low, that we might get a big rally. Since we hold the "fear trade" in the TCA accounts, that makes us "nervous shorts." The next Geithner presentation could come at any moment.
The key is whether there is a meaningful treatment of the troubled asset question. My RealMoney colleague, Marc Chandler, wrote an excellent article on the subject. Regular readers of "A Dash" will note similarities with our own advice. Here is the key quotation from Marc's article, but readers are strongly encouraged to read the entire piece:
There are three key components: removal of bad assets, re-capitalization of banks and reviving the capital markets. Geithner's ill-represented plan addresses each of them, and in this regard, is considerably more comprehensive than earlier efforts. Initially TARP was supposed to have financed the removal of the bad assets, but as we now know, Paulson, well, changed his mind. In his presentation, Geithner had the cojones to rename the seriously distressed financially engineered instruments "legacy" assets, but he did realize their removal was essential. The Financial Stability Plan (which supercedes TARP) calls for the removal of the toxic or "legacy" assets. Apparently, spending much thought on the name-calling game that Democrats typically are so poor at, Geithner unveiled the Public-Private Partnership…what the media calls the "bad bank" and others have called an aggregator bank (aggregates the toxic assets). It is finally the RTC-like structure. It will be empowered to buy up to $1 trillion of Mr. Geithner's legacy assets from the banks.
Conclusion
When we finally see the plan, watch to see whether it really deals with the "legacy" assets, achieving a price that will not crush existing banks, yet establish a market.
