Rescue Leaves Markets Cold

I N T H E N E W S
Rescue leaves markets cold

Stocks slide as investors reject plan as too vague
Milwaukee Journal Sentinel February 10, 2009
John Schmid Text Bloomberg News Photography
The stock market Tuesday delivered a resounding vote

of no confidence to the Obama administration’s plan
to unclog bottlenecks in the banking system that are
choking lending and hobbling the nation’s economy.
Stocks fell broadly throughout the day, including heavy

losses for Milwaukee-based Marshall & Ilsley Corp.
and Green Bay’s Associated Banc-Corp, after Treasury
Secretary Timothy Geithner outlined a long-awaited
bank rescue strategy that exasperated investors with its
lack of detail.
“The market reaction cuts to the heart of the matter,” said

Bob Atwell, the chief executive of Nicolet National Bank
in Green Bay. “Whatever the Treasury sets out to do, the Treasury Secretary Timothy Geithner testifies Tuesday at a Senate Banking Committee
stock market showed they don’t have confidence it will hearing in Washington, D.C.
get done.” “It was more of a series of aspirational statements,

which everybody already knew,” said Jacobsen, also an
Geithner did not answer the most urgent challenges that economics professor at Wisconsin Lutheran College.
confront banks: how will the government relieve banks of
the hard-to-sell mortgage-backed securities that weaken Stock market plunges
their balance sheets and constrict lending, who will
absorb the inevitable losses on those toxic securities, and Virtually every sector of the stock market lost ground,
how will those securities be priced. starting almost as soon as Geithner began speaking.
The Treasury’s announcement had been awaited by The Dow Jones industrial average dropped 381.99 points,
an investment community that has endured months of or 4.6%, to close at 7888.88. The Standard & Poor’s 500
market uncertainty with sell-offs that have eradicated index slumped 4.9% to close at 827.16, and the S&P bank
wealth and retirement balances. Geithner’s strategy index plunged 14%.
promises to marshal up to $2 trillion in taxpayer and
private-sector funds to prop up the nation’s banks. The declines included a 26% sell-off in the state’s biggest
bank, M&I, which lost $1.41 to end at $4.01.
Geithner left the investment community largely in the
dark about how he will tackle what many see as the “The perception now is that M&I, and banks of that size,
biggest impediment to any eventual recovery in the are not in the category of ‘too big to fail,’ “ Jacobsen said.
broader economy, analysts said. “It’s not Citibank or Wells Fargo or Bank of America,
which could prompt the Treasury to swoop in and save
Brian Jacobsen, a senior analyst at Wells Fargo in them.”
Milwaukee, called Geithner’s strategy a “non-plan.”
Page 1 of 3 Rescue leaves markets cold | Milwaukee Journal Sentinel February 10, 2009
I N T H E N E W S
M&I chief financial officer Greg Smith expressed “We have to both jump-start job creation and private
confidence that his bank remains solid. investment and we must get credit flowing again to
businesses and families,” he said.
“Many bank stocks performed similarly to ours today,”
Smith said, adding that the market reacted to Geithner’s The plan seeks to tackle problems on multiple fronts.
lack of specifics. “M&I has over $2 billion in excess Most of the attention centered on what Geithner
capital, we have among the highest reserves for potential called a Public-Private Investment Fund, to be jointly
loan losses and a strong liquidity position. And we view managed by the Treasury and the Federal Reserve
ourselves as having a position of strength.” board. The fund is meant to lure investors to help buy
up the hard-to-sell assets. It will start with $500 billion in
The state’s No. 2 bank, Associated, lost $1.81 or 11% to assets and eventually expand under Geithner’s plan to
end at $14.68. $1&ensptrillion.
The grim economic outlook triggered a sell-off in crude Because it relies on private-sector parties, the details of
oil futures as traders anticipate less demand for gasoline pricing those assets took on greater importance Tuesday.
and fuel oil. The benchmark price of light, sweet crude In another irony of a messy situation, banks will find
tumbled $2.01 to settle at $37.55 a barrel on the New York it hard to part with their mortgage-backed securities
Mercantile Exchange. It was the second day crude settled because the moment that someone buys them, a market
below $40, a price last seen three weeks ago. price will be established that in turn could compel banks
to write down the value of their books and possibly force
Washington’s attention has been fixated for weeks on a the banks to raise new capital, Jacobsen said.
separate economic initiative: the $800 billion stimulus
package that would bankroll infrastructure projects, cut Another disappointment came with a separate Geithner
taxes and create jobs. That legislation is meant to cushion proposal to use $50 billion in taxpayer money to
the blow of the downturn, which wiped out nearly enable millions of homeowners who face foreclosure
600,000 jobs in January and a total of 3.6 million since the to renegotiate the terms of their mortgage. While that
recession began in December 2007. plan helps struggling homeowners, Geithner was mum
about any initiatives that would support new mortgage
The economy’s gravest problems, however, lie with lending and reinvigorate the slumping housing market,
banks. Obama’s economic team had huddled for weeks economists said.
over what markets hoped would be a credible plan to
restore confidence in the financial system and coax banks All the while, said Atwell at Nicolet National Bank,
once again to make loans for cars, homes and businesses. Americans outside Washington and Wall Street are
seething over the idea of a bailout for the big banks.
The new administration has signaled that it wants a
fresh start after the Bush administration absorbed heavy “The government has to infuse an incredible amount of
criticism for its economic crisis management last year. capital - not to pay for tomorrow’s opportunities but to
pay for yesterday’s mistakes,” Atwell said.
‘Working against recovery’
Elements of bailout overhaul
“Right now, critical parts of our financial system are
damaged,” Geithner said. “Instead of catalyzing recovery, Here are the major elements in the Obama
the financial system is working against recovery and administration’s overhaul of the $700 billion financial
that’s the dangerous dynamic we need to change.” rescue program:
I N T H E N E W S
• Capital injections to bolster banks will continue.

This was the core of former Treasury Secretary
Henry Paulson’s approach; it accounted for $250
billion of the first $350 billion of the program.
Treasury Secretary Timothy Geithner pledged to
continue the injections but with more stringent rules
on use of the money. Banks with assets of $100 billion
or more will face “stress tests” by regulators to see if
they’re healthy. The administration didn’t say how
much of the second $350 billion would go toward
capital injections.
• An expansion of a Treasury-Federal Reserve program

to try to unclog lending in such areas as credit card
debt, auto loans and student loans. The program will
now also back loans involving commercial real estate.
The administration will provide up to $100 billion in
bailout money, up from an initial $20 billion. It will
support up to $1 trillion in Fed lending to bolster
consumer and business loan markets. The initial Fed
commitment had been for $200 billion in support.
• Creation of a public-private investment fund to back

the purchase of banks’ toxic assets. Officials estimated
the program could use bailout money to attract up to
$500 billion in purchases of toxic assets initially and $1
trillion eventually.
• Mitigation of mortgage foreclosures with use of $50

billion in bailout funds.

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I N T H E N E W S

Rescue leaves markets cold

The stock market Tuesday delivered a resounding vote

Stocks fell broadly throughout the day, including heavy

“The market reaction cuts to the heart of the matter,” said

get done.” “It was more of a series of aspirational statements,

• Capital injections to bolster banks will continue.

• An expansion of a Treasury-Federal Reserve program

• Creation of a public-private investment fund to back

• Mitigation of mortgage foreclosures with use of $50

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