Geithner seeks private capital to ease credit crunch

Treasury Secretary Timothy Geithner is due to announce a plan to draw private investors into a U.S. financial rescue package aimed at reducing the toxic assets many commercial banks have on their balance sheets.

In a markedly different approach from the previous administration, Geithner aims to spur the flow of credit through the economy once again not by injecting capital into troubled banks like his predecessor did, but rather by addressing the root cause of the credit crunch; the illiquid assets with continually declining market values.  While an announcement was yet to be made, it was widely expected an aggregator bank would be set up with some capital provided by private entities and could be backed by FDIC issued debt.

Our comment: While this latest measure does appear to be rewarding the banks for their mistakes, it also allows  banks to restructure with the ultimate aim of using their capital to start lending again. 

The Bush administration was criticized for panicking and effectively reverting to socialism when attempting to rescue the financial sector by providing government money to address corporate losses.  And rightfully so.

Geithner’s proposal, while similar on the surface, is different in nature – it only provides government backing in what is likely an attempt to gain the confidence of the market. The capital to be injected into the aggregate bank is to come from private investors, signaling a return to market-based economics.

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