Friday, July 10, 2009

Geithner Q&A

From the June 29 issue:

TIME: What you are suggesting is that because the system seems to be getting healthier, the banks think the price for the toxic assets is not high enough.

Geithner: The key test again for the system is, Are banks able to raise equity? Are investors confident enough in their ability to judge the strength of the banks' balance sheets that they're willing to put equity into a bank? We've seen substantial progress in that area

Geithner is right when he says that investors are confident in big banks. What he doesn't say, although he undoubtedly knows, is why.

Investors are confident in big banks because they now know that the government will not let them fail, and that their investments are protected against downside for this reason.

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