Treasury Lays Out Plan to Improve Financial Stability
Monday, October 13, 2008; 8:00 AM
The head of the government's $700 billion financial rescue plan said that officials are assembling a "toolkit" of methods to implement the program, including investing money directly into banks and buying individual mortgages from them.
In a speech to the Institute of International Bankers, Neel Kashkari, interim assistant secretary for financial stability, said a team is being assembled and hopes to move quickly to improve conditions that have left the country's credit markets "extremely impaired."
Among the measures Treasury is working on is a plan to purchase mortgage backed securities, to purchase whole loans from banks, and to insure "troubled assets," as well as a plan to purchase an equity stake in some institutions.
The Treasury also is defining the limitations on executive pay required by Congress.Those requirements may not extend to all measures in the toolkit, however.
"The law empowers Treasury to design and deploy numerous tools to attack the root cause of the current turmoil: the capital hole created by illiquid troubled assets," Kashkari said. "Addressing this problem should enable our banks to being lending again."
His remarks provided new details about how the bailout package will be put into practice. Along with purchasing from banks the larger and more complex assets known as mortgage-backed securities -- many of which are troubled because of homeowner defaults on the underlying mortgages -- Kashkari said that regional banks in particular may need help through the purchase of individual mortgages.
"Regional banks are particularly clogged with whole residential mortgage loans," Kashkari said, and a team at Treasury is working to set terms for how to identify, price and purchase such loans from those institutions.
A new program to insure troubled assets is also being developed, an effort that may allow banks to try to rehabilitate some troubled assets with the confidence that they are ensured against losses. Kashkari said that Treasury has made a broad appeal through the Federal Registers for ideas about how to structure an insurance program.
As well, he said Treasury is working on a "standardized program" for the federal government to invest directly in banks. Participation in the program would be voluntary, and would, he said, encourage banks to continue to raise private capital as well.