Geithner needs to lure hungry investors
Who'll buy the toxic assets? The administration has condemned greed, but now must find a way to motivate profit-seekers
WASHINGTON (Fortune) -- We caught glimpses of the many problems plaguing Treasury Secretary Tim Geithner and his bank rescue plan yesterday when his team suffered another in a string of withdrawals from top department positions and Geithner acknowledged in congressional testimony that his plan's price tag would top $1 trillion.
Now Geithner sits atop a sparsely populated department -- Sullivan and Cromwell chair H. Rodgin Cohen became the fourth official to withdraw his name from consideration for a top post -- as he struggles to fill in complex details of a promised public-private partnership to relieve troubled banks of so-called toxic assets.
The stress tests his team is conducting on the nation's top banks will help Geithner assess the size and scope of his mission. But they won't resolve a fundamental political obstacle: For any plan to work, Geithner is going to need to offer taxpayer help, possibly in the form of low-cost loans, to the very same people his boss has demonized -- profit-hungry investors.
In other words, Geithner's plan must lure greedy capitalists -- vulture investors and the like -- willing to take on risk only for the prospects of a substantial upside. "If you're a hedge fund you're not going to be interested in a 5% return, you're going to be interested in a 25% return," says David Smick, market adviser and author of The World Is Curved. "You're buying mysterious assets, no one knows the value."
Try explaining those kinds of returns to the populists in the White House or on Capitol Hill.
And this is merely a reference to the hedge funds and private equity investors Geithner has signaled he wants as partners. Imagine the fit the protectionists on Capitol Hill will throw if foreign investors, like sovereign wealth funds, are allowed into the action.
Geithner has said he wants to "mobilize and leverage private capital," but some in the industry say that to do so he will need to offer a premium to investors simply because of political torture they are certain to endure. "Treasury sat down with the big nine banks and said it was their patriotic duty to take TARP money," complains a top industry executive. "Now they're being investigated by Andrew Cuomo and Barney Frank. Who's going to want to do business with them? Who will ever trust them again? They need to offer an even higher rate for the psychic toll."
But that would clash with a President who set out to conquer the nation's "culture of greed" long before the financial collapse (he first took the message to Wall Street in the fall of 2007). That anti-greed campaign now rages across the halls of Congress, fed by images of Bernie Madoff on his way to jail and John Thain's $87,000 rug.
But not all greed is illegal, immoral or improper. Greed, William Safire once wrote, is a "hunger for more," and in a market system that is still (vaguely) capitalist, the profit motive encourages investors to take a flier on an idea, an invention -- or distressed assets.
The problem is how to balance that with a responsibility to taxpayers who will also be underwriting the risk. Despite the many complaints from Capitol Hill at the time, federal officials threaded that needle pretty well in the 1990s, when the government-sponsored Resolution Trust Corp. relied on profit seekers to liquidate failed savings and loans and their assets.
Geithner's appearance before the Senate Budget Committee yesterday suggests he is still struggling with an answer. When Republican Senator Judd Gregg of New Hampshire pressed him on the question of whether taxpayers will be put in a position of guaranteeing the profits of private investors, Geithner remained, as he has for weeks, vague. "That depends on the precise structure" of the partnership, he said.