Ouch!! I’m really feeling bad for Geithner and the beating he’s taking!!
So let me throw my hat in the ring and help him. At the same time, I could really use $420B!
What happened in the first place? I cover it in my videos The Three Little Securities.
A key part of the problem as I understand it is investment banks and related institutions (like insurance giant AIG) didn’t properly label and assess the risk of trading structured products like mortgage-backed securities.
Imagine if Don the Banker sold you a paper airplane and said that it was safe to fly it inside of your apartment because he’s confident in the components that made up the paper airplane.
And imagine if Bill the Insurer happily sold you paper airplane insurance without keeping a cash reserve in case you had a problem with the airplane and needed the insurance money–because in the past, the chances that the components of a paper airplane (glue, paper, ??) caused a problem was low.
But when the glue in the airplane combusts spontaneously, all Don the Banker could say is “I didn’t think that would happen.” And all Bill the Insurer could do was perhaps go out of business trying to pay you back.
And worse–imagine that you have $1000 wrapped up in the purchase of this airplane, you’d hope to keep getting an income off this plane, the income stopped AND you can’t sell it because noone will buy it?
Whew–one can only carry these analogies so far given how complicated this situation is. So I feel for Geithner.
Speaking as someone who familiar with calculating portfolio risk in the late 90’s/early 2000’s, it was possible that risk ratings were optimistic on products from some banks and possible that certain scenarios (like a mass mortgage default) wasn’t considered as a possibility. Not where I was, but at other banks of course.
So now we’ve got these products on the books of major companies that are like a cancer. What now?
Here’s where I hopefully can earn that $420B:
The Wall Street Geek’s Workable Plan to Solve the Banking Crisis
Step 1: President Obama announces that his top two priorities in 2009 are The Economy and National Security.
No longer does Wall Street feel like the neglected injured child watching the President appear to spearhead other initiatives such as stem cell research and healthcare. He’s got a team that can manage those details for him.
He can still speak to other initiatives. But at a presentation, for example, have another person on your team do most of the speaking (after getting them some media training).
Step 2: Geithner and our new CEO-in-Chief Jack Welch (plus a team of business people) visit key companies such as AIG, Citigroup, et al and talk with third level management–NOT the executives–to determine how those companies REALLY make money and what’s keeping them from making money/lending/etc.
Step 3: FIX IT! Start with the small banks and work your way up to the ones that are “too big to fail”.
If the small banks need capital so that folks in the town can borrow money and improve commerce locally, do it (within limits).
If a larger bank needs to sell part of itself to raise capital or adjust how it makes money, do it. And have a top economist act as project manager to ensure that the government isn’t overspending or harming other parts of our economy.
Line up the small successes and be orderly about tackling the problem, which may increase confidence with consumers and give the government the confidence to tackle larger problems.
Step 4: President should communicate consistently! Let people know what your team is going to do, what they’re currently doing, and what they did. Ask your team to make a project plan if that helps with communication, with dependencies/budget/timelines and post it in financialstability.gov.
My point is rather than start from the top down by trying to define a solution on a macro level, understand the problem on a micro level and work from the bottom up on small, solvable pieces of the problem. Gain consumer confidence, and actually get things done and fixed in the process.
Take this with a grain of salt because if I really had a solution, I’d be standing shoulder to shoulder with President Obama and Larry Summers. But it’s better sometimes to put something out there and have it not be perfect instead of not put anything out there at all.
Where’s the phone? 1-800-…