A Multi-Pronged Bank Plan
Saturday, January 31, 2009
The Obama administration has finished drafting the central elements of its plan to rescue the financial markets and is gathering feedback from regulators and Wall Street executives, sources familiar with the matter said yesterday.
While some details need to be hammered out, the strategy is likely to be laid out publicly in about a week, the sources said.
In finalizing the plan, officials have made a policy decision that could dismay lawmakers. The administration is likely to refrain from imposing tougher restrictions on executive compensation at most firms receiving government aid but instead retain looser requirements initially included in the Treasury's $700 billion rescue program, a source familiar with the deliberations said. Officials are concerned that harsh limits could discourage some firms from asking for aid.
The administration envisions a range of initiatives to jump-start the consumer credit markets, provide aid to struggling homeowners, and motivate banks to increase lending. The plan will also offer banks more capital and buffer them against losses on portfolios of "toxic" assets, backed by failing mortgages and other troubled loans.
Earlier this week, Treasury Secretary Timothy F. Geithner met with Federal Reserve Chairman Ben S. Bernanke, Federal Deposit Insurance Corp. Chairman Sheila C. Bair and Comptroller of the Currency John C. Dugan to discuss the plan, a source said. They met again yesterday. Administration officials have also begun to talk to Wall Street executives to receive input on how the government might relieve banks of troubled assets, the source added.
Several sources said Bair has been aggressively pushing for months for the government to use federal rescue funds to set up a government bank that would buy up the distressed assets. Such an institution would lessen the burden on her agency, which insures deposits at failing banks up to $250,000.
During the savings-and-loan crisis of the late 1980s and early 1990s, the federal government took a similar approach and established the Resolution Trust Corp. to wind down failing institutions. The effort cost taxpayers about $125 billion.
But Geithner told lawmakers this month that to address the current crisis, a government "bad bank" would be "enormously complicated to get right," and he raised concerns about its cost.
The scope of the toxic asset problem has reached $2 trillion, by the conservative estimates of banking analysts. The Treasury Department, however, has only about $320 billion left in the rescue program.
Geithner and other senior members of Obama's economic team are unlikely to pin their hopes on a single solution such as the Resolution Trust Corp. to solve the worsening crisis, sources said. Instead they prefer a more nuanced approach so they can apply specific fixes tailored to the host of problems facing the financial system.
Establishing a bad bank could be done in conjunction with offering banks federal guarantees that would absorb losses yet to be declared from the assets on their balance sheets, the sources said, speaking on condition of anonymity because the plan has not been announced yet. Treasury officials offered such guarantees during the multibillion-dollar rescues of Citigroup in November and Bank of America a few weeks ago.
Insuring losses is a safer bet than establishing a bad bank because the former requires the government to spend money only if assets continue to fall in value. But the proposal may be less effective in restarting the credit markets that buy and sell these assets, one of the sources said.
With either approach, the government may have to offer more capital to financial firms than has been provided so far. But the terms would be different than those required by the Bush administration, the source said. One idea under consideration is to offer money to financial firms in the form of bonds or preferred shares that convert into common stock over time. The aim would be to encourage banks to pay back the government more quickly before the conversion happens.
Treasury officials also have been considering for months whether to require institutions to match any federal aid with private capital. But they are concerned that banks may have a hard time raising money from private markets.
Obama's officials have said they will clearly lay out the conditions for any government investment. While relatively healthy firms are unlikely to face stiff restrictions on executive compensation, companies that need more dramatic government assistance would face more punitive terms, a source said.
Under the original rescue program approved by Congress in October, executives at financial firms for the first time faced federal limits on their multimillion-dollar pay packages. But those restrictions were unlikely to significantly reduce executive pay, analysts and banks said at the time.
The law largely focused on banning "golden parachute" payments to departing executives under certain circumstances. But most banks participating in the Treasury's capital purchase program were permitted to offer senior managers severance packages worth up to three times their average annual earnings. That amounts to a very large sum in most cases, the analysts said.