Vericool Finance

One thing that Hank Paulson learnt during his troubled tenure as US Treasury Secretary is that if you say you’re going to launch a bazooka, you’d better darn well do it.

Barely a fortnight into his new job, Paulson’s successor, Timothy Geithner, is in danger of repeating his mistakes. After months of ad hoc rescue plans, the markets hoped the new administration would deliver on its promise of a coherent, detailed plan to mend the financial system. What they got instead was strong on rhetoric, but offered little more than a bare-bone outline -and Wall Street threw its toys out of the pram.

The S&;P 500 fell 5% in the worst sell-off since President Barack Obama assumed office. Shares in Citigroup and Bank of America were hammered 15% and 19% respectively.

The chief problem with the $2trn bailout was that it fell between all the stools. It was neither well funded enough to recapitalise troubled banks, nor detailed enough to assure investors that the governmnet can solve the toxic asset problem - and there was a crucial lack of information about how each of these initiatives would work.

The reaction to the plan was a severe setback to the newly minted Treasury Secretary, who’d been hoping to gain some gravitas after a lengthy battle with Congress over his personal tax affairs, but there’s a good deal more at stake than Geithner’s reputation.

On some estimates, more than 1,000 US banks could fail over the next three to five years unless a credible plan emerges. Maybe the critics’ reaction to the plan was over-harsh. Who knows? This plan - once properly fleshed out - may end up working, but it would be unwise to count on it.

The lesson of all previous banking crises is that the problem isn’t properly lanced until the system is fully cleansed and suspect assets fully removed. Ideallogically, Americans are vehemently opposed to nationalism, even more than Britons. But when there is so much money already being used to prop up the banking system, what’s the difference?

Geithner now says he’s consulting to fill in the missing gaps. If that’s the case, why were we led to believe that a completed plan would be delivered this week?

The markets would forgive a delay caused by the desire to get the details right, but they don’t like being misled. Raising hopes and under-delivery may be standard procedure in the political sphere but it doesn’t fly in finance.

This was a catastrophic failure of expectation management that bodes ill for the new administration.