Saturday, February 7, 2009

New Plan to Help Banks Sell Bad Assets

By STEPHEN LABATON
WASHINGTON — After weeks of internal debate, the Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks and entice investors to purchase their most troubled assets.

The new financial industry rescue plan, to be outlined in broad terms on Monday in a speech by the Treasury secretary, Timothy F. Geithner, will not require banks to increase their lending. That is despite criticism that institutions that already received money from the Troubled Asset Relief Program, or TARP, either hoarded it or used the funds to acquire other banks.

The incentives to investors could be in the form of commitments to absorb some of the losses from any assets they purchase, should their values continue to decline. The goal is to relieve the banks of their worst assets so that private investors might then provide more capital.

Officials hope that that part of the plan is not labeled a “bad bank” administered by the government, although they expect that some might call it that.

No matter what it is called, the government would assume some of the risk of declining assets at the heart of the economic crisis. But by relying on a combination of private investors and government guarantees, the administration hopes to reduce its exposure to losses and avoid the problem of having to place a value on assets that the institutions have been unable to sell.

A central element of the plan would be a major expansion of a lending facility begun in November by the Federal Reserve Bank of New York when it was headed by Mr. Geithner. The program, which was initially financed by $200 billion in Fed money and $20 billion in seed capital from the $700 billion bailout fund, lent money to investors to buy securities backed by student, auto and credit card loans, as well as loans guaranteed by the Small Business Administration.

Obama administration officials say they have rejected nationalizing institutions by taking large ownership stakes. They also will not immediately seek additional money from Congress beyond the $350 billion left in the TARP fund.

With reports of lavish executive pay, extravagant corporate retreats and expensive office renovations at some of the institutions receiving assistance, political support for the program has sharply eroded in recent weeks. And as the White House has put forward a stimulus package of about $800 billion, there is recognition that Congress will very likely balk now at another request for bailout money.

But lawmakers said they expected the administration to seek more money for the rescue program later this year.

The banking plan will involve a close review of financial institutions, possibly including a so-called stress test to measure whether they have enough resources to weather a continued economic decline. It will also enable the government, when it provides a new round of investment, to convert the warrants for preferred stock it has already received from many institutions into common stock. The move, which essentially would swap debt for equity, would help relieve the balance sheets of those institutions, although it would also hurt other existing shareholders by diluting their common stock.

Lawmakers said they were told that Mr. Geithner would not spell out the details of much of the program next week, including how the government would use more than $50 billion from that program to help homeowners facing foreclosure.

For weeks, administration officials have been exploring several alternatives for reducing the wave of foreclosures. One proposal involves Fannie Mae and Freddie Mac, the mortgage finance companies now under government control, to help further stabilize the housing markets by providing guarantees on low-rate mortgages.

Another proposal, said to be favored by Lawrence H. Summers, the senior White House economic official, would provide incentives to entice investors in pools of mortgages — and the companies that service mortgages — to refinance troubled home loans.

An announcement on that part of the plan is expected to be made by President Obama, lawmakers said, possibly as early as next week.

Although critics have blamed the administration of George W. Bush for mismanaging the TARP fund by not pressing the banks receiving assistance to increase their lending, the new round of capital injections is not expected to come with government demands that the institutions provide more loans. But the new administration was expected to take other steps to encourage institutions to increase their lending, as well as to explain how much their lending had increased or decreased each quarter.

Democratic lawmakers who have been given previews on aspects of the plan praised it.

“The plan is very smart,” said Senator Charles E. Schumer, Democrat of New York, who declined to provide details of his discussions about the plan with senior administration officials. “It avoids one-size-fits-all. It will have an overarching effect on many institutions. But it doesn’t put all institutions in the same box.”

While some of the elements of the plan are similar to those used by the Bush administration, officials said on Friday that they hoped to overcome the mounting criticism of the earlier effort by lawmakers and economists by making the program more transparent and equitable.

This week’s new restrictions on executive pay and last week’s announcement of new lobbying rules that banks and other groups seeking assistance must follow have been part of the effort by the Obama administration to restore credibility to the program and regain support in Congress. That effort will be essential if the administration returns to Congress for more money.

http://www.nytimes.com/2009/02/07/business/07medhome.html?em

Copyright 2009 The New York Times Company

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