Buffet Hints at Geithner's Plan

During a marathon interview on CNBC this morning, Warren Buffet had a surprisingly upbeat take on the banks.

Buffet claimed that banking has never been more lucrative than it is now do to historically low interest rates and wide bond spreads. While he admitted some of the worst capitalized banks will likely not make it through this crisis, Buffet did say he expected most banks to earn their way out of the holes they are in.

And this is essentially the Geithner plan: give banks enough capital to keep them alive, and hope that they can earn their way back to health. Of course as a major shareholder in Wells Fargo, Buffet favors letting the, according to its own fair-value accounting, insolvent bank try to rebound. But why is Geithner apparently so willing to just cross his fingers and hope for the best? The politics would certainly be easier if the banks did not require massive injections of capital, but instead just needed enough to tide them over till they returned to profitability. But what about banks' increasingly toxic balance sheets makes this likely? Even if banks return to robust earnings, a whole host of mortgages, commercial real estate loans, auto loans, student loans, and credit card loans made at the peak of the bubble that have yet to go bust threaten to overwhelm any new revenue streams, and send banks further into insolvency. This seems like a repeat of Japan.