This week marked an important anniversary that nobody remembered to celebrate.
If was one year ago on Feb. 10 that the world was saved. And you didn't even send a card. Shame on you.
Seriously, a year ago the world was ending. Markets were in free-fall, and the banking system was collapsing. "Doing something" hadn't helped -- $700 billion in TARP money didn't help. Nor did bailing out Bear Stearns and AIG, merging Merrill Lynch, or throwing Lehman under the bus. When doing something fails, try doing nothing. Can't hurt. Might help. And so it did.
Nothing is precisely what Timothy Geithner did one year ago this week. Remember, he was the brand new Treasury secretary, on the job just a week or two after a bruising Senate confirmation process in which he was exposed for not paying all his income taxes.
Works for me! If we can't have a tax-cutter running the Treasury, let's at least have a tax evader. Shows his heart is in the right place. And indeed it was, because his do-nothing solution to the banking crisis proved to be brilliantly effective.
Here's exactly what Geithner did -- uh, didn't.
He declared that the top 19 banks would be given a "stress test." That's basically nothing. These banks have been regulated, tested, examined, poked and prodded by every government agency for years.
Then he declared that any bank that failed the stress test would be required to raise more capital. Nothing, yet again. Banks were already scrambling to raise capital, and couldn't do it. That's why TARP was created, to provide them the capital they couldn't otherwise raise. It didn't help.
But then came the really important nothing. Geithner declared that any bank that both failed the stress test and couldn't raise capital could have more TARP money. It would come in the form of mandatory convertible preferred stock. For anyone out there who's not a finance nerd, what that means is: a junior bond that can be converted into common stock whenever the company chooses.
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