US Treasury Secretary Timothy Geithner held yesterday a speech on the foreseen bailout measures which failed to reassure the markets. The Dow Jones fell 200 points from the start of his 30 minute speech to the end and finished yesterday 382 points behind the day before. Indeed, stock traders made him pay for the lack of specific details in his speech.
Driving investor doubts was Geithner’s failure to clearly address three issues at the heart of the crisis: Will banks filled with toxic debt be forced to fill in for bankrupcy? How will illiquid assets be removed from bank balance sheets? And what will be done to stop the decline in house prices that triggered the turmoil?
One of the major risk foreseen by other commentators was that the investors and the markets would try to second-guess where these bailout measures would go and therefore undermine those plans. It is already happening so, as we have seen in the last 18 months, when any new bailout measure was greeted with optimism and the Dow Jones (and other stock markets indices) increased.
But this time it was different. Stock market investors and analysts seemed to learn that a nice speach and a lot of money are not enough to rebound the free-falling markets.
The Standard & Poor’s 500 stock index tumbled 4.9 percent as investors dumped bank stocks on skepticism whether the plan will work. Bank of America Corp. plunged 19 percent and Citigroup Inc. dropped 15 percent.
And the European indices are free-falling too, a sure sign that the investors are disappointed. Credit Suisse, Peugeot and the European banks led a steep retreat in their home markets, after posting billions of losses.
The program Geithner laid out has three main elements: injecting fresh government capital into some of the country’s biggest financial institutions; establishing a public-private partnership to buy as much as $1 trillion of banks’ bad assets; and starting a credit facility of up to $1 trillion to promote lending to consumers and businesses. Paradoxically, these measures are more specific than the one of the previous administration, yet investors are expecting much more after 18 months of crisis.
Many experts are even advocating to stop keeping the zombie banks alive with government capital.