Markets crave numbers. They can price and reprice anything, even worthless securities, as long as they have a number attached to them.
What markets can't handle are assets with no number. When those assets are really big, markets wobble. That's what's happened on the world stock exchanges in the aftermath of Tuesday's unveiling of an unfinished bank rescue plan.
The lack of clarity caused the Dow to fall 382 points Tuesday and left world markets with no clear direction Wednesday. Japan's Nikkei fell 0.3 percent. Europe's major exchanges hovered around 0. The Dow around midday was trying to climb back to the 8000 level.
First, assess the problem
Until these markets can begin to discover how big banks' problems are, no other number really matters. Not the $800 billion stimulus that Congress's conferees are now hammering out. Not the up to $1 trillion in federal lending that Geithner proposed to get consumer credit moving again.
Without some way to value toxic assets, investors won't buy bank stocks, confidence in banks will remain shaky, and credit won't flow properly.
In announcing an outline of the bank rescue, Treasury Secretary Timothy Geithner revealed the government was planning on a public-private investment fund with initial federal funding of around $500 billion. The goal is to create a market for the toxic assets but how to bring in private investors was unclear. "We are exploring a range of different structures for this program," Mr. Geithner said.
Why the delay?
Why is the Obama administration still finding its way on a problem it has known about since November? There are three possibilities.
First, valuing these assets is hard. They're complex and it takes time. Of course, price discovery is what markets do and they're far better at it than government regulators are.
The second possibility is that banks and regulators don't want price discovery because the numbers are so bad. Asked point blank by Sen. Jim Bunning (R) of Kentucky if banks were technically insolvent, Geithner demurred in his testimony Tuesday.
Total losses for US-originated loans and securities will equal $3.6 trillion (out of a total $23.2 trillion), they estimate. Roughly half of that is held by US banks and broker dealers. That $1.8 trillion loss is more than the $1.4 trillion they have in assets.
The third possibility for delay is that this is a deal that no one wants to make. Bankers don't want to sell their assets to the government at current prices because shareholders would never forgive them. Politicians don't want the federal government to buy them because if they overpay, voters will never forgive them.
The reason for the delay may be a combination of all three possibilities.
Open the books
Tough and scary though it may be, it's time to open up the books and let investors begin to replace doubt with real numbers. Even Geithner says so, sort of.
"In a simple way, governments make two types of errors in these things," Geithner told the senators. "One type of error is to underestimate and ignore and hide the full scale of the problem in the hopes we can stretch it out and grow our way out of it. There's another type of error governments make, which is to move too aggressively in ways that cause a deeper contraction ... than would otherwise be necessary to occur."
Balance is important. But the clock is ticking.