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Globe Editorial

Geithner's halting detox plan

March 24, 2009
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MORE THAN a year into a grave crisis on Wall Street, Washington is still figuring out how to get the banking system working again. Sadly, the solution may not yet be at hand.

Yesterday Treasury Secretary Timothy Geithner unveiled the Obama administration's latest effort - a complex plan deploying public loan guarantees, public capital, and some private money to rid big banks of securities derived from soured mortgages. Yet the plan seems too incremental to fix the problem afflicting the financial sector.

Right now, private investors don't want to buy so-called toxic assets from banks at anything close to their purchase price. Banks, meanwhile, don't want to sell off assets at deep discounts. Under Geithner's plan, banks would be directed to auction off these assets, and government assistance to private investors would prop up the price that these private firms are willing to pay.

In so doing, the Treasury hopes to generate a going price for these toxic assets. And in theory, public money coupled with private money could go much farther in soaking up toxic assets than public money alone.

The downside is that taxpayers would bear most of the risk in these transactions. Meanwhile, private investors, who would put up a fraction of the money needed, would manage the transactions and stand to benefit handsomely if they work out.

If the plan goes forward, the administration will need to impose strict oversight and transparency rules. Yet Wall Street resists the accountability that a bailout-weary public demands (see below) and Geithner has shown little inclination to act as an enforcer.

At some point, the Obama administration could be forced to deal with the toxic-asset problem more directly - by taking the worst-off banks into a temporary receivership. The banking system has stabilized to the point that it may be worth giving Geithner's alternative a try. Let's hope it works. But if it fails, the administration will have no excuse to avoid a more aggressive approach.

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