Financial market angst remains high over the lack of a clear strategy to rescue the US banking system under the plan unveiled by the administration of President Barack Obama, analysts say.
Fixing the banking system will be a critical element of any economic recovery by restoring health to the sector and getting credit flowing again.
But Treasury Secretary Timothy Geithner omitted key details in unveiling the plan last week, notably how a proposed public-private partnership would absorb the toxic assets on bank balance sheets, and how a so-called "stress test" for the major financial institutions would work.
"It remains unclear how banks with capital shortfalls will be treated and how much of the plan will be voluntary," said Alec Phillips, analyst at Goldman Sachs.
But Phillips added that "once these details are cleared up, the plan is likely to represent the most important step to date in strengthening the banking system."
Geithner's plan calls for a public-private fund aimed at soaking up toxic assets clogging the financial system, starting with at least 500 billion dollars. It also included new efforts to boost consumer lending, limit home foreclosures and provide new capital for banks.
Some analysts say the new plan aims to identify the weakest banks and either save them through additional capital injections or allow them to be taken over by regulators.
Gerard Cassidy, analyst at RBC Capital Markets, said the plan needs to be tough in weeding out banks that are not viable.
"US regulators need to move in and close down insolvent banks, regardless of size," he said. "The banks are seized, the deposits are sold along with any good assets, and bad assets are transferred" to an authority, to be liquidated.
Nobel laureate economist Paul Krugman said the stress test may help the administration intervene with big banks in the same manner it has been doing with smaller banks in trouble.
"The problem is not toxic assets," he said, referring to risky real estate-related assets being held by banks.
"The problem is that financial institutions have lost a lot of money and many of the big ones, if they are not actually insolvent, are very close."
Krugman said the "stress test" may reveal that "five or maybe seven of these institutions are actually not viable," and thus could be put into government receivership, noting that this is the same process used for smaller banks that fail.
Michael Jones, chief investment officer at Riverfront Investment Group, said the administration must choose between the "punitive" solution of taking over the troubled banks and bad assets or "generous" guarantees for the banks to allow time for beaten-down mortgage assets to recover.
Any effort to find a middle ground, Jones said, could delay a recovery by propping up "zombie banks" that "undermine the profitability of other firms."
Some analysts say the administration may be forced to nationalize key banks despite Geithner's insistence that the sector remain in private hands.
"The US banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it," says Nouriel Roubini, a New York University economist who predicted a major crisis two years ago.
"Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end."
Michael Gregory, economist at BMO Capital Markets, says the administration needs additional time to develop a credible plan.
"Given the enormity and complexity of the US banking crisis, it was probably unrealistic to expect too much detail at this early stage of the new administration," Gregory said.
"Geithner was giving a roadmap, but the market was impatiently asking 'Are we there yet?'
"And, there might be another reason for the disappointment -- the simple realization that time and options may be running out for the banking system to be saved -- last resort: nationalization -- and economic depression averted."
Fixing the banking system will be a critical element of any economic recovery by restoring health to the sector and getting credit flowing again.
But Treasury Secretary Timothy Geithner omitted key details in unveiling the plan last week, notably how a proposed public-private partnership would absorb the toxic assets on bank balance sheets, and how a so-called "stress test" for the major financial institutions would work.
"It remains unclear how banks with capital shortfalls will be treated and how much of the plan will be voluntary," said Alec Phillips, analyst at Goldman Sachs.
But Phillips added that "once these details are cleared up, the plan is likely to represent the most important step to date in strengthening the banking system."
Geithner's plan calls for a public-private fund aimed at soaking up toxic assets clogging the financial system, starting with at least 500 billion dollars. It also included new efforts to boost consumer lending, limit home foreclosures and provide new capital for banks.
Some analysts say the new plan aims to identify the weakest banks and either save them through additional capital injections or allow them to be taken over by regulators.
Gerard Cassidy, analyst at RBC Capital Markets, said the plan needs to be tough in weeding out banks that are not viable.
"US regulators need to move in and close down insolvent banks, regardless of size," he said. "The banks are seized, the deposits are sold along with any good assets, and bad assets are transferred" to an authority, to be liquidated.
Nobel laureate economist Paul Krugman said the stress test may help the administration intervene with big banks in the same manner it has been doing with smaller banks in trouble.
"The problem is not toxic assets," he said, referring to risky real estate-related assets being held by banks.
"The problem is that financial institutions have lost a lot of money and many of the big ones, if they are not actually insolvent, are very close."
Krugman said the "stress test" may reveal that "five or maybe seven of these institutions are actually not viable," and thus could be put into government receivership, noting that this is the same process used for smaller banks that fail.
Michael Jones, chief investment officer at Riverfront Investment Group, said the administration must choose between the "punitive" solution of taking over the troubled banks and bad assets or "generous" guarantees for the banks to allow time for beaten-down mortgage assets to recover.
Any effort to find a middle ground, Jones said, could delay a recovery by propping up "zombie banks" that "undermine the profitability of other firms."
Some analysts say the administration may be forced to nationalize key banks despite Geithner's insistence that the sector remain in private hands.
"The US banking system is close to being insolvent, and unless we want to become like Japan in the 1990s -- or the United States in the 1930s -- the only way to save it is to nationalize it," says Nouriel Roubini, a New York University economist who predicted a major crisis two years ago.
"Nationalization is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end."
Michael Gregory, economist at BMO Capital Markets, says the administration needs additional time to develop a credible plan.
"Given the enormity and complexity of the US banking crisis, it was probably unrealistic to expect too much detail at this early stage of the new administration," Gregory said.
"Geithner was giving a roadmap, but the market was impatiently asking 'Are we there yet?'
"And, there might be another reason for the disappointment -- the simple realization that time and options may be running out for the banking system to be saved -- last resort: nationalization -- and economic depression averted."
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