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,

Geithner did not answer the most urgent challenges that
confront banks: how will the government relieve banks of
the hard-to-sell mortgage-backed securities that weaken
their balance sheets and constrict lending, who will
absorb the inevitable losses on those toxic securities, and
how will those securities be priced.
The Treasury’s announcement had been awaited by
an investment community that has endured months of
market uncertainty with sell-offs that have eradicated
wealth and retirement balances. Geithner’s strategy
promises to marshal up to $2 trillion in taxpayer and
private-sector funds to prop up the nation’s banks.
Geithner left the investment community largely in the
dark about how he will tackle what many see as the
biggest impediment to any eventual recovery in the
broader economy, analysts said.
Brian Jacobsen, a senior analyst at Wells Fargo in
Milwaukee, called Geithner’s strategy a “non-plan.”
which everybody already knew,” said Jacobsen, also an
economics professor at Wisconsin Lutheran College.
Stock market plunges
Virtually every sector of the stock market lost ground,
starting almost as soon as Geithner began speaking.
The Dow Jones industrial average dropped 381.99 points,
or 4.6%, to close at 7888.88. The Standard & Poor’s 500
index slumped 4.9% to close at 827.16, and the S&P bank
index plunged 14%.
The declines included a 26% sell-off in the state’s biggest
bank, M&I, which lost $1.41 to end at $4.01.
“The perception now is that M&I, and banks of that size,
are not in the category of ‘too big to fail,’  “ Jacobsen said.
“It’s not Citibank or Wells Fargo or Bank of America,
which could prompt the Treasury to swoop in and save
them.”

Page 1 of 3 Rescue leaves markets cold | Milwaukee Journal Sentinel February 10, 2009

M&I chief financial officer Greg Smith expressed
confidence that his bank remains solid.
“Many bank stocks performed similarly to ours today,”
Smith said, adding that the market reacted to Geithner’s
lack of specifics. “M&I has over $2 billion in excess
capital, we have among the highest reserves for potential
loan losses and a strong liquidity position. And we view
ourselves as having a position of strength.”
The state’s No. 2 bank, Associated, lost $1.81 or 11% to
end at $14.68.
The grim economic outlook triggered a sell-off in crude
oil futures as traders anticipate less demand for gasoline
and fuel oil. The benchmark price of light, sweet crude
tumbled $2.01 to settle at $37.55 a barrel on the New York
Mercantile Exchange. It was the second day crude settled
below $40, a price last seen three weeks ago.
Washington’s attention has been fixated for weeks on a
separate economic initiative: the $800 billion stimulus
package that would bankroll infrastructure projects, cut
taxes and create jobs. That legislation is meant to cushion
the blow of the downturn, which wiped out nearly
600,000 jobs in January and a total of 3.6 million since the
recession began in December 2007.
The economy’s gravest problems, however, lie with
banks. Obama’s economic team had huddled for weeks
over what markets hoped would be a credible plan to
restore confidence in the financial system and coax banks
once again to make loans for cars, homes and businesses.
The new administration has signaled that it wants a
fresh start after the Bush administration absorbed heavy
criticism for its economic crisis management last year.
‘Working against recovery’
“Right now, critical parts of our financial system are
damaged,” Geithner said. “Instead of catalyzing recovery,
the financial system is working against recovery and
that’s the dangerous dynamic we need to change.”
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“We have to both jump-start job creation and private
investment and we must get credit flowing again to
businesses and families,” he said.
The plan seeks to tackle problems on multiple fronts.
Most of the attention centered on what Geithner
called a Public-Private Investment Fund, to be jointly
managed by the Treasury and the Federal Reserve
board. The fund is meant to lure investors to help buy
up the hard-to-sell assets. It will start with $500 billion in
assets and eventually expand under Geithner’s plan to
$1&ensptrillion.
Because it relies on private-sector parties, the details of
pricing those assets took on greater importance Tuesday.
In another irony of a messy situation, banks will find
it hard to part with their mortgage-backed securities
because the moment that someone buys them, a market
price will be established that in turn could compel banks
to write down the value of their books and possibly force
the banks to raise new capital, Jacobsen said.
Another disappointment came with a separate Geithner
proposal to use $50 billion in taxpayer money to
enable millions of homeowners who face foreclosure
to renegotiate the terms of their mortgage. While that
plan helps struggling homeowners, Geithner was mum
about any initiatives that would support new mortgage
lending and reinvigorate the slumping housing market,
economists said.
All the while, said Atwell at Nicolet National Bank,
Americans outside Washington and Wall Street are
seething over the idea of a bailout for the big banks.
“The government has to infuse an incredible amount of
capital - not to pay for tomorrow’s opportunities but to
pay for yesterday’s mistakes,” Atwell said.
Elements of bailout overhaul
Here are the major elements in the Obama
administration’s overhaul of the $700 billion financial
rescue program:
Rescue leaves markets cold | Milwaukee Journal Sentinel February 10, 2009
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• 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.

Page 3 of 3 Rescue leaves markets cold | Milwaukee Journal Sentinel February 10, 2009