Treasury Secretary Timothy Geither Outlines New Comprehensive Financial Stability Plan

Treasury Secretary Timothy Geither outlined plans for a "New Financial Stability Plan" comprised of primarily four things:

1. Stabilization of the system and restoration of confidence in markets- Federal bank regulators will come together to institute uniform standards to help clean up and strengthen banks, and conduct "stress tests" to ensure the nation's largest banks can withstand a worsening economy.

2. Revitalization of lending and increasing much-needed credit flow to consumers and businesses - The Treasury and the Fed are creating a new consumer business lending initiative to leverage up to $1 trillion dollars to stimulate the secondary lending markets, bringing down borrowing costs for worthy borrowers and unfreezing credit markets.

3. Get financial markets working again- Creation of a new Public-Private Investment Fund which provide government capital and financing to leverage private capital to buy up the "toxic assets" impacting lending. This would allow financial institutions to clean up their balance sheets while letting private sector buyers determine the price for previously illiquid assets.

4. Curb the housing crisis - Treasury will work with the Federal Reserve to commit $50 billion to reduce monthly payments and establish loan modification guidelines for government and private programs. The Financial Stability plan will also require all firms receiving federal funds participate in foreclosure mitigation plans to stem the housing crisis.

As a response to the public perception of the first half of the TARP dollars, a new framework of oversight and transparency has been developed.

At first glance, this plan seems to be a much more logical approach to the remaining TARP dollars (and potentially an additional $2.35 trillion) that addresses many of the underlying problems of the current crisis instead of narrowly focusing on bank re-capitalization. Lowering mortgage rates and enforcing forclosure mitigation could be a solid first stem in stopping the free-fall of housing prices (although I still anticipate at least a 10% decline). Furthermore, the creation of the Public-Private investment fund, is a very creative response to the removal of bad assets from lending institutions to solidify the balance sheets; using private valuation and incentives to price the assets, with government gurantees supporting transactions. This certainly is meant to replace the "bad bank" scenario, and, at least for now, does not head in the direction of zeroing out shareholders and discounting creditors. It should be noted, however, that these two approaches seemingly appear to work against one another.

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