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In Geithner we trust?

It will take time before we know if it works, but the plan to ease the credit crunch has some good ideas.

March 24, 2009

Treasury Secretary Timothy F. Geithner revealed more details Monday about the administration's plan to relieve the credit crunch. Not surprisingly, it called for taxpayers to help bankers, insurance companies and other financial industry players sell their illiquid mortgage-related assets. We won't know for months whether the plan will work, because much depends on the owners' willingness to accept the prices offered. Yet we welcome the effort to have those prices set by the market, not the government. And we hope the program's launch will shift lawmakers' attention from the symbolic fight over Wall Street bonuses to more substantive issues, including the foreclosures that are undermining the assets the government is about to acquire.

Under the new Public-Private Investment Program, the government will try to buy distressed pools of loans or securities in partnership with investors. Because the government will also provide loans or guarantees to the investors, taxpayers will shoulder most of the risk -- as much as 94% of it in the case of the loan pools. To mitigate the potential cost to the government, investors will negotiate the prices paid for the assets, and they'll absorb the first losses.

Geithner said the government would not subject its partners to new limits on pay or bonuses. That's as it should be. These firms, after all, are joining the team of rescuers, not grasping for a lifeline. Yet it remains to be seen whether investors are willing to take Geithner at his word or to believe that the rules won't change after the program launches. They have a right to be skeptical, especially in light of Congress' efforts to impose punitive taxes on bonuses paid by American International Group and other rescuees.

The furor over the AIG bonuses may already have borne fruit: New York Atty. Gen. Andrew Cuomo reported Monday that most of the biggest recipients have agreed to give it all back. Meanwhile, the taxpayers would be better served if Congress stepped up efforts to help lenders avert the foreclosure wave. As we've said before, lawmakers can certainly do more to encourage loan modifications that keep borrowers in homes while still yielding higher returns than lenders would get through foreclosures.

Geithner, meanwhile, has to stay true to the real goal of the program, which isn't to protect banks -- it's to help the market see which firms are healthy and which aren't. The sludge on their balance sheets is making it hard for banks to raise capital, causing them to hoard what they have and make fewer loans. That's why it makes sense for Washington to help create a market for those assets. The sooner the financial system rebounds, the faster the economy will too.

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