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Geithner earns G7 trust, bank plan still to convince

ROME - After disappointing markets with a sketchy bank rescue plan, U.S. Treasury Secretary Timothy Geithner came to the Rome this weekend needing to prove to Group of Seven colleagues that he was up to the job of fixing the U.S. financial system.

He largely succeeded in earning their good will and arguing that his plan was more than a skeleton of wishful thinking. But he has left them -- and investors -- still hungry for details and the confidence that his ideas will actually work.

"You can have the best plan in the world, it has to be executed," Bank of Canada Governor Mark Carney told reporters during the meeting.

"This is a comprehensive plan, the will is there. We look forward to the execution and that will have an important bearing on global access to credit," Carney said.

Geithner's first trip to the meeting of finance ministers and central bank governors as Treasury Secretary came less than three weeks after he took office and just three days after he announced a "framework" for shoring up the U.S. financial system that was painfully short on details.

Investors hoping for a more comprehensive plan that gave clear and strong government action to remove toxic mortgage assets from bank balance sheets were sorely disappointed. Stocks fell sharply, with the S&P 500 marking a 4.8 percent fall for the week to test the bear market lows of last November.

London-based Lombard Street Research labelled Geithner a "weak link" and said his announcement was merely "starting a process to develop a plan."

Deutsche Bank Securities chief economist Joseph LaVorgna said: "It's not big enough. There are few details. The administration is trying to buy time and they don't get the fact that we need to get something yesterday."

Public Private

At the heart of the plan announced on Tuesday is Geithner's idea for a public-private investment fund that would put government capital alongside private capital to buy up illiquid assets from banks, clearing up questions about the size of their losses and freeing their balance sheets for more lending.

But previous efforts for both private-sector and public- sector solutions to the crisis have failed. Geithner's predecessor, Henry Paulson, in 2007 proposed a bank-funded vehicle to buy up assets only to find little interest.

Paulson initially intended last year's $700 billion bank bailout fund to buy assets through a reverse auction process, but dropped the idea in favor of direct capital injections when it became apparent that the process would be too complicated and struggle to halt the slump in market confidence.

Participants said Geithner still looked uncomfortable under the media glare at a news conference on Saturday, but he spoke passionately about the plan and the challenges facing the administration after an edgy display in Congress last week.

He is determined not to make the same mistakes that Paulson made and he told G7 ministers that he wants to "get it right" before launching the program so that he would not have to shift strategy midstream. He also wanted their thoughts on it.

The initial design process for the plan brought in ideas from the Federal Reserve and the Federal Deposit Insurance Corp, and others were floated, such as relaxing asset accounting standards and more comprehensive government funded "bad bank" programs.

A senior Treasury official on Saturday said this increased market expectations, but that some of those elements would have left U.S. taxpayers taking on too much risk.

"That's partly why you had a little bit of disappointment as (we) took many of those proposals in the design essentially off the table for a generally available program," the official said, adding that the public-private structure was a better means of restarting markets for thes assets.

Either way, the administration now promises that its plan to address the U.S. housing crisis will be more complete. Proposals to be announced Wednesday will have "quite a high level of detail," the official said, and would be "consequential".

Approval

Geithner said the plan drew a lot of interest from his G7 colleagues because they face the same issues in trying to leverage government resources and bring private capital back to their banking systems.

French Economy Minister Christine Lagarde said Geithner "justified the combination of public and private to better establish pricing mechanisms which was a difficulty in the Paulson plan."

Whatever their views on the bank plan, G7 participants expressed confidence in Geithner, whom they have known for years as a Federal Reserve Bank president and a policy maker for International Monetary Fund and the U.S. Treasury.

"He knows what he's talking about, he has a very easy way of expressing his views," said European Central Bank President Jean-Claude Trichet.