Economic Update – Geithner to Unveil PIC Bank Plan

No details until later on Monday, but the latest federal government effort to apply Drano to the credit markets will be called the Public Investment Corp. (to be commonly known as PIC?). PIC will be funded by part of the original $700 billion bailout passed by Congress, along with Federal Reserve and Federal Deposit Insurance Corp. resources, with the aim of sucking up toxic assets from the banking system. If that sounds familiar, it is. It’s like the original intention of the bailout bill as passed, but later abandoned. The government will also try to encourage private investors, especially through billions in low-interest loans to the likes of hedge funds, to finance their acquisition of toxic assets. Naturally there’s a variety of opinions on whether this will actually work, with many observers stressing the risks. “While this program could earn a profit, as did the Resolution Trust Corp. during the Savings and Loan Crisis and the Home Owners Loan Office during the Great Depression, the program Secretary Geithner is cooking up could unnecessarily stick the taxpayer with big losses on those toxic assets and give the banks big, unearned profits,” said Peter Morici, a professor at the Smith School of Business of the University of Maryland, in his most recent newsletter. “It could save many bank executives’ careers, while running up the federal deficit even further and undermining international confidence in the dollar.” In somewhat smaller-scale news, but just as indicative of the times, Citigroup North America Inc. is seeking to have the Oakwood Shopping Center in Gretna, La., seized by Jefferson Parish, La., and sold after the mall’s owner, Chicago-based General Growth Properties (GGP), missed payment on a $95 million loan to Citigroup. GGP has been struggling with its debt load for some time now–roughly $23 billion maturing in the next five years, significant portions of which have proved stubbornly hard to refinance and which are already in default. Casino and hotel owner Herbst Gaming Inc. has become the latest such operation to file for bankruptcy. In statement following the Chapter 11 finding, company CEO Troy Herbst called the company’s debt “burdensome.” The bankruptcy shows that the softening of the gaming industry isn’t only confined to Las Vegas, which has seen a considerable downturn lately as people cut back on gambling and other recreational activities associated with that city. Herbst only owns one casino in the city itself–the off-Strip Terrible’s Hotel & Casino–with other holdings scattered around southern and northern Nevada, plus a few in the Midwest. In the equity markets, following a mostly positive week or so, Wall Street saw a drop on Friday, with the Dow Jones Industrial Average down 122.42 points, or 1.65 percent. The S&P was down 1.98 percent and the Nasdaq was down 1.77 percent.