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U.S. Treasury Secretary Timothy Geithner this week revealed details of his plan to get toxic assets — primarily Collateralized Mortgage Obligations — off the books of American banks, freeing up capital so the banks can resume lending. The stock market reacted positively to the news.

Under the plan, private investors will put up as little as 6% in capital to purchase equity, a number which suprised some observers as quite low. But Geithner, discussing the plan on Monday morning , dismissed those worries by stressing that private investors would be on the hook before taxpayers. “Their entire capital will be at risk, that’s the important thing,” he said.

If there are gains, however, the government will benefit as well, Geithner said. “If there’s a return over time, which we expect there will be, taxpayers will share in that return.”

The Geithner plan has broadened somewhat since he first announced in early February that the Treasury intended to join with hedge funds, private equity firms, and other investors in public-private partnerships to buy up the bad assets weighing down banks. Following that speech, investors and others on Wall Street heavily criticized Geithner for providing only vague details as to how the partnerships would work. The stock market immediately tanked, with the Dow Jones industrial average finishing down 4.6% that day.

Wary of a repeat of that performance, Geithner and other officials issued a flurry of detail on Monday. Officials said the plan would rely on three principles: maximizing the impact of each taxpayer dollar, shared risks and profits with private-sector participants, and private sector price discovery for the “legacy” assets.

“This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly,” Treasury said in a briefing paper. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases—along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.”

The program will leverage funds using a maximum six to one debt to equity ratio. Officials said by using $75 to $100 billion in capital from the Troubled Asset Relief Program (TARP) and capital from private investors, the plan will generate $500 billion in purchasing power to buy the troubled assets. The program could be expanded to purchase up to $1 trillion in troubled assets.

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This is the week U.S. Treasury Secretary Timothy Geithner attempted to put to rest the problem of toxic Collateralized Mortgage Obligations, creating a system to take them off the books of U.S. banks by selling them to public-private partnerships. The plan is too complex to explain here but its underlying goals are clear, to save the banks and arrest the fall of U.S. housing prices.

This follows last week’s dramatic move by the Fed to drive down interest rates by directly purchasing mortgage securities.

Alas, while market will probably greet both plans with a roar it seems doubtful to Home-Account that they will have significant success over the long term.

But wait, there’s more! Geithner also needs a way for banks to improve the book value of assets they can’t sell or choose to retain. To accomplish this we see coming modification of the mark-to-market rule that helped spark this credit crisis last summer.

We expect the Treasury, Fed, and the Financial Accounting Standards Board will come up with some kind of “don’t ask-don’t tell” system for valuing these assets that will give lip service to mark-to-market while practically returning asset valuations to the same murky place they’ve mainly lived in since 1937. Again, the market will soar, buoyed by a dubious system of accounting with two sets of books – the essence of non-transparency.

While these efforts will hopefully create at least a bottom for the housing market, they seem intended far more to help banks than to help home owners, which is not the way it should be. Talking to lenders it is clear that the Treasury’s plans for modifying mortgages are moving forward only slowly and are months from being implemented on a scale broad enough to even show that the plan will work. By that time millions more homes may be lost to foreclosure. Not good.

Homeowners and their mortgages are at least as important as banks and it is time for the Obama Administration to prove they understand that.

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For all the talk of declining interest rates and mortgage modifications, it is difficult for us to find much evidence of either happening yet in real terms or great volumes. Yes, published mortgage rates are being pushed down by aggressive actions on the part of the Federal Reserve, but much of this good news for homeowners is mitigated by increasing mortgage fees from Fannie, Freddie, and FHA. Lenders, too, are pushing fees higher to deal with a crush of refinance business that isn’t making them much money because of low approval rates. The market IS somewhat better for homeowners or prospective homebuyers who are extremely well qualified, but millions of underwater homeowners have no relief in sight and may not find any. It could get very ugly for them.

The Obama Administration seems to be taking its time about implementing the housing programs it has announced. First they announce, then they detail, and eventually they roll it out, or at least that’s the plan, because we see little evidence yet of such roll-outs. Few if any mortgages are being modified, for example, along the recent Treasury guidelines.

We at Home-Account are optimistic but realistic. The Obama Administration has good intentions but those intentions are tempered by multiple agendas. The Administration seems more focused right now on using the mortgage crisis to set a long-term spending agenda than with jump-starting the economy. We’d like them to hurry up.

We worry, too, that in their final versions these government programs won’t even be as useful as they have been described. We were told, for example, that the mortgage modification process would use interest rate reduction, longer term, and principal reduction. Yet the new web site http://makinghomeaffordable.gov seems to offer none of these options. Maybe they didn’t get the memo.

But this too shall pass. Lenders seem to be gearing-up for higher refi volumes. Some of this is an attempt to outrun delinquency and loss rate with new loan production, (the old finance company way to drive loss rate down — lend your way to lower delinquency, more volume). But government programs to save the homeowner do not seem to be a top priority this week with either lenders or government.

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Wells Fargo & Co. Chairman Richard Kovacevich criticized the Federal Government for retroactively adding rules to the Troubled Asset Relief Program (TARP), which he said forced the bank to cut its dividend, and called the administration’s plan for stress-testing banks “asinine.”

When the U.S. Treasury made the nation’s nine largest banks accept capital investments in October, it signaled the industry was weak, Kovacevich, 65, said in a March 13 speech at Stanford University in California. Even though Wells Fargo didn’t want the money, it had to comply with the same rules that the government placed on banks that did need it, he said.

Kovacevich joins a growing list of bankers who are chafing at restrictions imposed by the TARP program, which affect lending, foreclosures, pay and perks. Those lenders including Bank of America Corp., U.S. Bancorp and Goldman Sachs Group Inc. have said they want to give back the money. More than 500 banks, insurers and credit card companies applied for TARP capital, and the government has distributed almost $300 billion.

Wells Fargo slashed its dividend by 85 percent on March 6 to 5 cents a share, citing savings of $5 billion and the need to build a capital cushion in case the market deteriorates further. Last month the San Francisco-based bank made a quarterly payment of $371.5 million to the Treasury for interest on the $25 billion TARP investment.

Kovacevich said the government is still making mistakes as it tries to save the industry. The “stress test,” designed to determine which of the 19 largest U.S. banks need more capital, provides opportunities for short-sellers to drive down bank stocks and can hurt confidence in the system even more, he said.

The Obama administration announced the test last month and said it will help determine which banks are healthy enough to withstand surging unemployment and tumbling home prices. Results are due by late April, according to the Treasury.

“We do stress tests all the time on all of our portfolios,” Kovacevich said. “We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.”

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March 18, 2009 — U.S. stocks advanced today, erasing more than half the loss in the Standard & Poor’s 500 Index since President Barack Obama took office, on an unexpected rebound in homebuilding and speculation that the Federal Reserve will outline plans to bolster the economy.

Citigroup Inc. and JPMorgan Chase & Co. rose at least 7.7 percent as the KBW Bank Index extended its gain since March 6 to 46 percent. KB Homes, the fourth-largest U.S. homebuilder, rallied 9.3 percent and Home Depot Inc. rose 6.7 percent as housing starts unexpectedly climbed 22 percent in February, the most since 1990.

Experts noted, however, that the increase in housing starts was almost entirely for multi-unit housing, NOT single family homes, where starts remain at historic lows.

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