Thursday, February 12, 2009

Having Thought Some More Regarding "Geithner's Plan," I'm Starting To Think We May Have Something Here....

Sometimes being an impatient sort, I certainly wish more concrete details were known regarding the Geithner bank plan. But the reality is that banks like BAC, JPM and WFC just received a gift and so did the broad market (eventually).

So much money has been thrown at our mortgage-backed security problem that it will never be a problem again. Balance sheets will be fortified and lending will increase. From what I'm hearing, most investors have missed the glass half-full aspect of this whole thing.

Here is why this plan is (probably?) (hopefully?) the real deal:

1. This trillion dollar superfund is actually a more viable solution to our problems than merely suspending mark-to-market ONLY would have been. As I've written at some length, MTM (FAS 157) should at least be severely altered, if not completely repealed. The most effective timeframe from that course of action was about 18 months ago, so it's long since passed. However, we all understand that we live in an era of increased transparency and getting rid of mark-to-market completely would give us less transparency.

No matter what your personal preference was with regards to mark-to-market, it's important to remember that Geithner's solution will get the job done as well. He will be able to artificially prop up the market for those "fur coats in August."

2. Geithner's superfund will act as a permanent specialist for mortgage securities. The specialist acts as the market maker to facilitate normal trading conditions during abnormal circumstances. The stock market uses specialists and so should every other kind of market that may experience short-term inefficiencies.

Specialists actually can make a lot of money. The projections for the government to generate high returns on this deal look promising. I believe this is the reason why Geithner wanted the superfund so badly: He wants to burn those in the private sector who have caused this crisis.

3.This superfund is what Hank Paulson knew we needed all along. Go all the way back to October 2007 when Paulson tried to bring the big banks together to form a fund, but quickly found out there wasn't enough private capital to do it. He needed a trillion but couldn't get it from the private or public sector.

Paulson thought TARP 1 might be sufficient for a superfund/specialist fund but the emergency had gotten so out of control that he had to use the money for capital infusions. TARP 1 ended up being a bandage for the symptoms; Geithner's superfund is the logical next step of the healing process that the Treasury has known about for over a year. For the first time we are now treating the cause!

4. It will allow the market to sustain its next rally. I have known for some time that the next bull market would not begin until a permanent solution for the banks was in place. For a moment, TARP 1 appeared to be the solution, but as soon as Paulson began emergency capital injections we knew that it wasn't the long-term fix.

Investors who fret over the lack of details are missing the big picture: The Fed finally has the right amount of money to take care of this thing. It's looking like the market will once again be a safe place to invest right after we digest the dismal first-quarter data coming our way in April. The market will be able to rally because of what Geithner just did.

This plan has been in the making for a long time -- Geithner didn't just come up with it last week. The $14 trillion mortgage security market has always needed a superfund to back it up and it finally got one. This plan provides transparency going forward, it will protect the banks from future real estate corrections and for the first time we can start thinking about finding a true bottom in this market.

The biggest winners going forward will be those stocks who have been pummeled down to nothing because of solvency issues or nationalization fears. Some of my favorites in this sector are ETFC and BAC. I'd love to see where those stocks are trading by year end.

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