The best part for these investors is that they can only win, because the government carries the lion's share of the risk. "Wall Street is getting paid to re-arrange the deck chairs on the Titanic," says financial analyst Ed Yardeni, "but hopefully with a better outcome." The exotic financial products of the American real estate mania have been sitting like lead on the balance sheets of Citigroup, Merrill Lynch and the like for months. They could have disposed of these assets long ago. There is no lack of buyers, but the banks have been unwilling to go along with the kinds of discounts -- up to 70 percent -- potential buyers are demanding. Terrified of additional billions in write-downs, the banks are simply holding on to the securities.
Will Geithner's plan free up the credit market? Will the banks finally get their balance sheets under control and regain the confidence of the markets?
The discussion of the taxpayer-funded clearance sale on toxic mortgage-backed securities was still underway when Geithner launched his next offensive last Thursday, presenting sweeping proposals on supervision of the financial markets -- ideas that accommodate the Europeans abroad and placate voters at home.
The public has been outraged over the idea that once-celebrated bankers -- harkening back to earlier days -- were being paid handsome bonuses that were ultimately coming out of taxpayers' pockets. Given the current level of public anger, the concept of "control" simply sounds more attractive than the notion of a "tax giveaway."
What Geithner is proposing sounds like a revolution, at least by American standards. The treasury secretary wants the government to have the authority to intervene when troubled banks, investment funds or insurance companies pose a risk to the entire financial system.
Under the plan, hedge funds would be forced to disclose the names of their investors and trading partners, as well as their level of indebtedness. It also calls for tighter regulation of derivatives. "To address this will require comprehensive reform," Geithner said. "Not modest repairs at the margin, but new rules of the game."
The draft communiqué for the London meeting also describes what those new rules could look like. "We are agreed that the future regulation and supervision of the global financial system will be based on internationally agreed standards and systematic cooperation," the text reads.
Regulation, the draft communiqué reads, should be expanded to encompass "all financial markets, instruments, and institutions, including hedge funds." The goal is apparently to close the gaps in the existing regulatory framework.
Under the plan, a new organization would be created to monitor the stability of the financial markets and, together with the IMF, install an early warning system. The G-20 leaders also plan to introduce common guidelines for executive compensation. Tax havens and countries that are not cooperative in implementing the new rules would be ostracized and slapped with sanctions.