Economic Update — Can Geithner Plan Deal With Toxic Assets?

What’s the money quote from Treasury Secretary Timothy Geithner’s speech introducing his plan for all that money Congress allocated last year to TARP II? Maybe it’s that the plan will “cost money, involve risk and take time,” which he said Tuesday morning. Investors didn’t much like that, perhaps because Geithner was a little short on specifics, especially on how to value those pesky toxic mortgage-related assets that Geithner’s public-private scheme would seek to take off the hands of banks. Maybe that’s what the Secretary was talking about when he said that “we will go through periods in which things get worse and progress is uneven or interrupted.” Responding to the plan, things got worse on Wall Street, where progress has been uneven or interrupted for quite a while now. The Dow Jones Industrial Average sank 381.99 points, or 4.62 percent, well below 8,000. Likewise, the S&P 500 was down 4.91 percent and the Nasdaq lost 4.2 percent. On the other hand, at least one real estate industry group seemed pleased by Geithner’s plan. “The Treasury’s announcement today is an extremely positive step toward reconnecting the credit markets for the huge commercial real estate sector,” said the Real Estate Roundtable’s CEO Jeffrey DeBoer. “Extending the Term Asset Backed Securities Loan Facility [TALF] to newly originated AAA securities backed by commercial real estate loans is a common-sense reform that will have positive effects for the economy.” Treasury’s plan, DeBoer posited, will help forestall commercial real estate defaults, provided it thaws credit markets. “With hundreds of billions of commercial real estate mortgages maturing this year alone and no functioning credit market, many people are concerned that borrowers will technically default,” he said. Certainly the specter commercial real estate defaults, which have been relatively low compared with residential defaults, is now on the minds of the industry. On Monday, at its annual conference in San Diego, the Mortgage Bankers Association released a survey noting that $171 billion in loans held by non-lenders for commercial properties will mature this year. Not all of those loans will go bad or be un-refinanceable, but it does leave the door open to a serious uptick in commercial defaults. Back on Capitol Hill, the U.S. Senate managed to pass the president’s stimulus package, but that’s only the beginning of the sausage-making-like process of legislative negotiations, since the House and Senate must now reconcile their versions, which have considerable differences in size and emphasis. The latest retail-oriented victim of the recession isn’t a retailer, but many retail locations worldwide won’t be quite the same without its services. Fort Mill, N.C.-based Muzak Holdings, noted creator of elevator music, has filed for Chapter 11 reorganization, reportedly because it has $437 million in debt payments to make next month, but not enough cash on hand to do so. The company is in intense negotiations with its creditors to come up with a settlement, which brings up the question of whether Muzak is being piped into the meeting rooms to unconsciously persuade creditors to cut the company a little more slack.