Tim Geithner's BIG Gamble

As the Treasury Secretary's toxic-asset plan (PPIP, for acronym lovers) sputters out, soon to wind up on the ash heap of discarded ideas to solve this financial crisis, it's worth pausing to consider what lies in the balance: nothing less than Geithner's own neck.

Consider: the Obama crew takes office in January. What are you going to do about the financial crisis, everyone demands with a hysterical edge. Amid much blaring of trumpets, Geithner promptly appears before Congress with ... no plan, just a lot of artful blather. Hmm. Not good.

But it's still early, he just hasn't had time to craft a detailed plan, and he does return to unveil a real proposal. The trick, he explains, is to remove the toxic legacy assets from the books of the banks; the mounds of crappy loans and securities are weighing them down like an anchor, forcing them into a defensive crouch and causing them to shy away from making loans.

Geithner's plan is for the government (the money) and private investors (the brains) to form partnerships to buy the bad debt. This will set market prices for assets that the banks protest they can't get a fair price for because of too little liquidity. PPIP is widely scrutinized, debated, critiqued, assailed. Meanwhile, the media forget to take a hard look at the plan's key linchpin: the banks themselves. Will they go along? The major banks are strangely silent about Geithner's proposal.

Instead, they arm-wrestle a few accounting changes, post some stunning first-quarter earnings, and then begin to insinuate they don't really need this PPIP idea. And this is Geithner's big moment. This is his gut-check moment of intestinal fortitude. He can either sharply remind the banks that, yes, we just finished bailing you out and preventing the financial sector from imploding and yes, you DO need to play ball with this plan, sorry. Or he can fold like a cheap accordion.

Of course the handwriting is on the wall: Stress tests that no bank can fail. Banks initially handed billions of dollars, no strings attached. A financial lobby that has its tentacles wiggling into every office and closet in political Washington. A history of regulators and Wall Street executives swapping desks back and forth, until you can't tell who's working for whom (or angling to work for whom, someday).

As Obama's team cries "look at the green shoots!" Geithner folds behind a wall of mumbles about how his plan may not be needed any more. Deep down, he probably knows that's untrue. But caving in to Wall Street has become a reflexive gesture for Washington's powerful. So he does.

But the big gamble is this: We're in a quiescent period right now. The stock markets aren't tanking. Worry and panic have abated. But the news still looks bad on a lot of fronts: high unemployment, sagging home prices ... and banks still holding lots and lots of impaired assets.

See the Bank of International Settlements report summed in this recent FT article:

The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.

Geithner has chosen to lay low and pray the banks can work out their problems on their own. But if this crisis blows up again, as I predict it will, he will be in a very difficult spot. When he tries to roll out a new plan, an understandably angry public will protest, "Wait a minute. Plan number one was hold on a minute, I'm working on it. Plan number two was a public-private partnership that vanished into thin air. Why the hell should we trust you at all at this point? You either don't have the gumption to stand up to the country's banks or you don't have the perseverance to see your own plans through."

At that point, I think Geithner will probably get sacrificed. There is widespread popular anger simmering below the surface, ready to explode when things slide downward again. And they will. Banks know they have a backlog of crap on their books. You can put a TARP over a big pile of manure, but it's still there, and it's still stinking.