Buy the Rumor, Sell the …

The equity market certainly bought the rumor of the bailout plan (hereafter referred to as the “Geithner Plan”), rallying like crazy over the past week on nothing but bad news across the globe. But on the day when the big news was finally expected to hit, Treasury Secretary Geithner’s release of his “comprehensive plan,” he said absolutely nothing. Weeks of planning. A day’s delay in making sure he was ready, really ready for his coming out party. Only problem was, those that came to the party left. Immediately and rapidly. Today’s market news was no better or worse than any other over the past week, but somehow equity traders proceeded to lop almost 5% off its value. Do you think investors, like the Treasury, might be just a little jittery, placing a little too much hope on the impact of a plan that few thinking rationally consider a panacea?

My friend Paul Kedrosky posted an excerpt from President Obama’s discussion on ABC Nightline tonight. The punch line: while being creative with statistics, the President dismissed Sweden’s (successful) approach to restructuring its banking sector on both economic and ideological grounds. His stance that Sweden “only” nationalized five banks, while the US would need to nationalize thousands to achieve the same effect, is both specious and absurd. No discussion of relative GDPs. No comparison of the size of the banks that were nationalized relative to, say, the top 10 banks in the US. It was one of those typical “a politician says it on TV so it must be true” moments, only I’m really disappointed that President Obama is resorting to such tactics to sell the Geithner Plan not a month into his Administration.

His discussion of different cultures is slightly more valid but no less meaningful as the problems at hand require sharp and decisive actions, like those specifically avoided by Geithner and his advisors thus far. President Obama had this to say:

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.

And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.

The approach of Good Bank/Bad Bank, with an immediate requirement for mark-to-market accounting across all portfolios not supported by term financing embraces private capital and, in fact, requires it. A principal difference between this approach and the Geithner Plan is that it places the costs where they belong – on lousy managements and moral hazard-hoping shareholders and bondholders – instead of where they do not (the US taxpayer). Further, it forces swift accountability and dealing with the depths of the problems upfront, instead of deferring the pain and hoping for a market recovery to bail us out. Plans built on hope invariably fail, and do not establish a solid foundation on which to re-build broken balance sheets, businesses and industries. Messrs. Geithner and Obama would have you believe otherwise, and hide behind ideology as a principal motivator of their actions.

I had hoped for so much more coming out of a stirring victory, broad-based enthusiasm and words filled with promise and action. Instead, we’ve gotten a plan and an ideology that appears frighteningly similar to that which preceeded it, which failed miserably by any accounting. No real accoutability. No real acknowledgement of the magnitude of the problem. Deeply concerned with stock market reaction today instead of where it might be in three years, five years, ten years. This is why I’m scared out of my mind.

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