Geithner enchants the markets

Investors applauded the Treasury Secretary's plan to have regulators help private investors rid banks of toxic assets. But for how long will the love affair last?

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By Paul R. La Monica, CNNMoney.com editor at large

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What do you think of Geithner's plan to enlist private firms in the bank bailout?
  • It's good - we need their money
  • It's bad - it won't work
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NEW YORK (CNNMoney.com) -- Tim Geithner went from zero to hero in a matter of just a few days.

Last week, people were calling for the Treasury Secretary's head in the wake of the AIG (AIG, Fortune 500) bonus brouhaha.

But now that he has finally unveiled the public-private partnership plan to buy up toxic assets from banks, all of a sudden Geithner's Tim the Enchanter. The Dow surged nearly 500 points Monday, a gain of 6.8%, and stocks around the globe soared on the news.

"It's a buying stampede," said Jeffrey Saut, chief investment strategist for Raymond James Financial. Saut thinks that it's now possible that the market hit bottom earlier this month.

Banks in particular were enjoying huge gains. Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500), two of the banks most often cited as having the biggest toxic asset problems, were big winners. Citi's stock shot up nearly 20% while BofA's stock skyrocketed more than 25%. Other less-troubled big banks such as JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500) and U.S. Bancorp (USB, Fortune 500) all sported double-digit percentage gains as well.

Still, should investors really be taking bets that the worst is over? Many have been burned by falsely thinking the bottom had finally arrived.

And there is still a healthy dose of skepticism about whether the plan to have the Treasury, FDIC and Federal Reserve help big mutual fund firms, hedge funds and other private investors buy up much of the banking sector's spoiled asset-backed securities will really work.

"I don't think this will lead to a sustained rally. This is a good idea but the primary issue with the industry is still capital," said Vincent Boberski, an independent market strategist.

"I doubt the Treasury and private investors are going to overpay for these assets, and banks have lost a ton of money and capital," Boberski added. "So this by itself, doesn't remedy the problem. This won't inspire banks to lend more because they still have concerns about their capital positions."

Make no mistake. It is probably premature to sound the all clear sign for the market, or economy for that matter, until it is clear that banks are being nursed back to health.

"It always comes down to the banks. Ultimately, you can't fix the economy without the banks functioning normally," said Quincy Krosby, chief investment strategist with The Hartford.

But it does seem encouraging that Geithner's latest proposal has a lot more nuance to it than the Financial Stability Plan that he unveiled last month. The fact that Bill Gross, the legendary bond investor at Pimco, has already indicated that his firm will take part in the program is a good sign.

"The market is pleased with the private money component. There is a sense that Geithner would not have come to the market with this plan without an emphasis on details. It must have been vetted carefully with potential investors," Krosby said.

Boberski agreed that one reason why investors seem to be reacting so positively to the latest announcement from Geithner is that the plan finally lives up to the advance billing and hype. There is steak there, and not just sizzle.

"Most of the plans by the Treasury under the Bush administration and Obama administration have been more or less piecemeal up until this point. The scope of this plan is much bigger and comprehensive," Boberski said.

So what's next? Will the rally continue? It's impossible to know for sure what will happen in the short-term. Some are dismissing Monday's move, as well as the rally earlier this month, as a mere short squeeze -- i.e. bearish investors who've borrowed stocks and sold them being forced to buy shares back to cover their positions and minimize losses.

But Saut said he's hopeful this rally has legs because he thinks a lot of savvy money managers are finally starting to become more convinced that the market's comeback is for real and are not just buying to cover short-selling positions.

In other words, if the market keeps climbing, investors may start buying due to fears that they could be missing out on another big upwards move.

"Professionals are starting to believe this rally, and most of the hedge fund managers I talk to are so heavy in cash," Saut said. "So if this market keeps going up, they will have to commit money to stocks in the next few weeks or risk showing investors that they are stuck with all this cash at the end of the first quarter."

Shameless plug alert: Before I started writing The Buzz, I covered the media business for several years at CNNMoney.com. Some of this reporting is the basis of a book I've written about News Corp. CEO Rupert Murdoch called Inside Rupert's Brain, which was published on March 19 by Portfolio, an imprint of Penguin Group (USA).  To top of page

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