North American financial markets were largely disappointed with the latest plan to stabilize financial markets from the U.S. Treasury, and, as the economic research firm Global Insight Inc. explains, the primary problem was the lack of detail provided by the government.

The new Treasury Secretary, Tim Geithner, outlined his plan to salvage the financial system Tuesday, but it was far too short on detail to provide much comfort for many market players. “The bottom line from the Geithner speech is that it was too general, and it lacked the specifics needed to be credible,” according to Global Insight.

“The speech had too many political overtones, and the politically charged preamble by Senator Chris Dodd did not set the stage appropriately for what was essentially a communication directed mainly to a technical audience from a key administration technocrat,” it adds.

The speech set out plans to continue injecting capital into banks, a new public-private investment fund to purchase troubled bank assets, an effort to boost lending by expanding the Federal Reserve-sponsored term asset-backed securities lending facility, and a plan to reduce foreclosures.

Yet, Global Insight says, “While the speech was widely anticipated, it was short on details”, noting that Geithner outlined broad principles of transparency and accountability, and provided a general outline of the programs that the Treasury will focus on. “Beyond the expansion of the TALF facility, though, the secretary provided very little detail on the specifics of how the other key programs would work or the amount of public capital that would be committed. As a result, the initial reaction in the market was negative,” it notes.

“Probably the biggest omission from the speech was the lack of specifics on dealing with the immediate ‘burning platform’ issues in the banking and credit markets,” it says. “Most importantly, with the U.S. and global recessions intensifying, the pressures on the banking system remain huge, notwithstanding the capital injection of close to US$276 billion under the first phase of the TARP program.”

Global Insight says that further large write-downs to bank assets are pending, which will put additional and severe downward pressure on banking system capital. “Unless that void is filled fairly quickly—we estimate that the banking system will require an injection of US$250–300 billion of additional capital during first-half 2009—we will continue to see very tight lending conditions, and the unlocking of the credit markets that is essential for securing a recovery will simply not happen,” it adds. “The biggest risk is that the massive fiscal-stimulus program that is rolling through Congress now will be stillborn as a result of not dealing up front with these critical capital adequacy issues in the financial markets.”

With respect to the proposal to establish a public-private investment fund to deal with troubled assets, the details were “extremely hazy”, Global Insight says. “The concept of a public-private joint venture to deal with this problem strays away from the FDIC proposal of creating a public-sector ‘bad bank’, as well as the successful model of the publicly funded Resolution Trust Corporation,” it says.

“The problem is that whenever public and private capital are co-mingled in an entity, it generates a conflict of interest between private incentives and public policy purposes. While the merits of leveraging private capital to solve this problem are worth exploring, creating the right structure for this public-private fund entity to be successful will be very tricky indeed, and it will eat up valuable time that we cannot afford to lose,” it suggests.

IE