Geithner's Plan is a Start, but...

Treasury Secretary, Timothy Geithner, rolled out some of the details of what insiders are referring to as TALF 2.0.  This program has two componets, the Legacy Loan Program and the Legacy Securities Program. These programs are expected to help the commercial real estate industry based upon the premise that loans and securitiees collateralized by real estate are fundamentally undervalued due to a liquidity discount as opposed to drastically reduced cash flow expectation.The public/private partnership investment program will create a pool of buyers for a market in which there are currently no buyers. For the securities program, the Treasury will oversee the auction process and for the loan program the FDIC will provide the oversight. Buyers will partner 50%/50% with the FDIC or the Treasury and that partnership will borrow money from the government to create purchasing power of up to $1 trillion in the first phase of this program (I am calling it the first phase because there will undoubtedly be additional capital required to address the massive amount of  toxic assets on the balance sheets of institutions). The newly formed entity will borrow on a non-recourse basis and the private sector component of the partnership has losses limited to their initial investment. The substantial incentives and debt guarantees provided by taxpayers to private asset managers should be enough to drive prices to levels satisfactory to sellers.The questions, however, are several and the primary question of whether the credit supply resumes depends on the true health of banks. Some of the questions revolve around the appetite hedge funds and private equity investors will have for a program controlled by a government that is prone to changing the rules midstream. The recent furor in Congress over executive compensation has been frightening and with the way the White House has tongue lashed Wall Street at every turn, will the Street want to help? Sure they will. Why? Because it is a tremendous money making opportunity and billions will be made by those who can manuver through the system. Another question is whether this can be accomplished without unduly wasting taxpayer money.Other questions revolve around whether banks will decide to sell their assets through this program. To what level have the assets been written down? What is the expected sale price via the auction? Can the bank set a reserve? How will these assets be valued? Many of these questions have not been answered yet.To the extent participants do indeed participate, the result will likely be an easing of credit as the capital ratios at banks should be greatly enhanced by these programs. Banks have more cash than they have ever had but capital levels are stressed due to the mark-to-market accounting rules which force banks to mark assets to “market”. But the fact is, when there is no market, you are only guessing at what market is. A few forced transactions do not make a market.An enormous issue for the commercial real estate market which these programs do not directly address is the status of CMBS loans and how a borrower can deal with maturing loans in a market where there is no replacement financing available and, moreover, there is no one to speak to at ”the lender”. A borrower with a performing loan, who is making their monthly payment, which is approaching maturity, will be in technical default if they cannot refinance. Today, it is unlikely they will be able to and the effects of TALF 2.0 will probably not be tangible enough in the short term to address the massive refinancing needs commercial real estate is facing in 2009. A solution to this dynamic is needed quickly as the first performing loan to be held in technical default because of maturity could be the first of many dominos to fall.