Geithner's Baptism of Fire

On Monday, when US markets were closed, Royal Bank of Scotland announced it lost something in the region of £28 billion last year, and the FT ran a column with the headline "Shoot the bankers, nationalise the banks". On Tuesday, when US markets opened, there was carnage in the financials, with RBS down a whopping 70% in dollar terms and State Street finally going the Way of All Banks (rapidly towards zero).

This isn't all bad. The markets are waking up to the fact that most of the banking system is both insolvent and losing money: a lethal combination. With future write-offs larger than the present value of any (distant) future profits, it's really hard to see how there's much if any equity value in the banks at all. And given the massive and unexpected fourth-quarter losses from the likes of RBS, Merrill, and Citigroup, it stands to reason that the XLF financial-sector index ETF should trade lower than its previous low in November. Plus, markets abhor a power vacuum.

Tomorrow, Tim Geithner's confirmation hearings will begin -- and if the Senate Finance Committee improbably starts giving him a hard time, expect another brutal day in the markets. This is no time for a Bush administration hold-over like Stuart Levey to be running Treasury: we need someone in there who is able to speak for the Obama administration and take some tough decisions.

Much more likely is that Geithner will get through the Senate with a slap on the wrist for his tax problems; I hope that as soon as he's confirmed he lays out with great clarity both the principles underlying his future treatment of the financial sector and the way in which he intends to put those principles into practice. For Geithner, there will be no honeymoon period: he's getting thrown straight into a shark-infested deep end. And the decisions he makes in his first days in office will set the tone for his whole tenure at Treasury. I hope he's worked out already what they're going to be.