The stock market plummeted and the critics cried there were too few specifics when Treasury Secretary Timothy Geithner announced what could be up to $2 trillion in fresh capital and financing designed to shore up big-bank balance sheets and thaw near-frozen debt markets.
Local investor opinion is that Geithner plan will take time
The market was disappointed by the Treasury Department's plan, but the plan wasn't designed to provide a quick fix for our woes.
February 13, 2009 at 1:44AM
Geithner wouldn't endorse the preferred plan of many who want the government to take ownership of hundreds of billions of distressed mortgage-backed securities at rock-bottom prices. Nor would he nationalize the banks, the other extreme. And he has left the door open to relaxation of accounting rules that would permit mortgage holders to base their value of the portfolios on a higher, industry-preferred "cash flow" basis instead of the mark-to-market basis that has cost so much capital.
In short, Geithner did not offer a silver-bullet, quick-draw solution. His plan is flexible and will take time. And, just as important, it involves hundreds of billions in private capital to buy devalued mortgage-backed assets.
Congress and the public are furious over the first $350 billion in government investment last fall to the now-sullied likes of Citigroup and Bank of America and other teetering financial behemoths. Anything that appeared too close to Government Bailout II wasn't going to fly.
Regardless, the upshot was doom and gloom and what one economist called Treasury's "shock and ugh" plan. The short-term traders voted thumbs down.
Did the Obama administration blow it?
Mark Simenstad, head of fixed-income funds at Thrivent Financial, knows there are no quick fixes.
To be sure, the worst-performing pools of mortgage-backed subprime debt are still trading at cents on the dollar.
"But we are starting to see prices of some [non-government insured] mortgage-backed securities start to rise modestly," Simenstad said. "There's a lot of cash on the sidelines looking for yields. Institutional investors, real-money accounts, are starting to look at some of these mortgage-backed portfolios prices at 50 cents on the dollar and, although there's still skepticism over some of the AAA-rated stuff, they are starting to peck away.
"I think as capital looks for higher yields, we're going to see investors get more comfortable with some of this."
Phil Grodnick's Minneapolis Portfolio Management Group's composite portfolio has topped the return of the S&P 500 for 10 years in a row with a patient, value-oriented style. Grodnick, joined by son Harrison since 1993, served investors well in recent years by staying away from financials. He was wary of too much leverage in the big financial houses as their market value swelled from 10 percent to 25 percent of the S&P 500.
However, Grodnick isn't beating his chest or rooting against the already-trounced shareholders of Wall Street's former finest.
He's quietly optimistic that Treasury, the now-attentive Federal Reserve -- and time -- as well as value hunters in the debt market will start working things out as mortgage foreclosures are slowed, the federal stimulus spending kicks in and the housing market bottoms.
"You have to have faith," said Grodnick, 72. "We have seen tough times and tough markets before.
"We believe in capitalism and entrepreneurs and that good people will work together. Every day we get up and we use the products of the companies we own, such as 3M and Kraft. When you're gloomy and depressed, that's the time to buy. And we have not seen valuations this low on good stocks since the 1970s."
Across the river, Bill Sands -- the chairman of St. Paul's Western Bank Corp., one of the state's largest and most successful independent banks of the last 30 years -- ticks off the list of excesses that violated the fundamental rules of underwriting in the mortgage and banking industry brought to us by a compliant Federal Reserve, complicit politicians, greedy consumers and too much debt and derivatives during the real estate bubble years.
"It's going to be three to five years for bank valuations to come back," Sands said this week. "There's less loan demand from good businesses right now. We need to stay vigilant and profitable and communicate with our employees and our customers about our good financial condition. I remember that things were impossible in 1991-92, as well, and the regulators were impossible to deal with after the collapse of the savings and loan industry.
"It's hard not to have doom and gloom. But I'm with the Obama administration. Things will get better."
In magnitude, we are gripped by the worst financial crisis since the Great Depression and the highest unemployment since 1981-82.
Grodnick's composite portfolio rose 48 percent in 2003, the year after the last recession ended.
"We are heavily invested in gold, energy, infrastructure, water and agricultural-related companies," Grodnick said. "These directly tie into today's problems and solutions. We are long-term investors, not traders. We are willing to sit and be patient.
"This is a wonderful opportunity if you think the country has a future. And we do."
Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com
The cuts, including 475 headquarters jobs, come amid a corporate restructuring in response to falling sales and profits.
