Treasury Presses Ahead With Plan For Toxic Assets
Sunday, March 22, 2009
The Treasury Department will unveil the next step in its financial rescue efforts tomorrow, announcing that it intends to create a government body, called the Public Investment Corp., to finance the purchase of as much as $1 trillion in soured loans and toxic assets from ailing banks, according to sources.
The plan calls for the new entity to combine its resources with the Federal Deposit Insurance Corp., the Federal Reserve and private investors to buy those loans and other assets. But the government will put far more money into the deals and take on more risk than the investors, which could include hedge funds, private-equity firms, pension funds and foreign investors with U.S. headquarters, the sources said. The corporation will be funded with $75 billion to $100 billion from the $700 billion financial rescue package.
Key details of the toxic asset purchasing program are not yet finalized, said officials in contact with the Treasury. Some expressed concern that the markets would expect too much out of Monday's announcement. When Treasury Secretary Timothy F. Geithner first sketched out the administration's rescue plan last month, he was criticized on Wall Street and on Capitol Hill for being too vague and creating uncertainty in the markets.
The Obama administration also risks a backlash from lawmakers and ordinary Americans who expressed outrage over $165 million in bonus payments by American International Group to employees of its most troubled unit -- despite the firm receiving more than $170 billion in federal aid.
White House officials said they are seeking a solution to the AIG bonus controversy in light of a bill that the House passed Thursday that would impose punitive taxes on bonus payments at all financial firms. Industry officials say the House measure would scare off many banks from taking government aid because the majority of their employees receive bonuses. The banks could still survive, but without federal assistance they would not have enough capital to restart lending, which is considered central to reviving the economy.
The administration's goal, one senior official said, is to pursue compensation reform that addresses public outrage while maintaining stability in the financial system.
The toxic asset initiative is only one piece of the administration's financial rescue package, which includes efforts to stabilize banks, aid the consumer credit markets and provide relief for struggling homeowners to head off foreclosures, a Treasury official said.
"Our singular focus is on increasing lending to support economic recovery. Everything we do to stabilize the financial system is done with that goal in mind," added Stephanie Cutter, a Treasury adviser to Geithner. She declined to discuss details of the plan. "Ridding bank balance sheets of problem assets is the next step in that process, but it alone won't solve the credit problem."
The government's effort to deal with toxic assets and loans harkens back to the original intent of the Troubled Assets Relief Program, or TARP, that Congress approved in October.
After the measure was signed into law, Bush administration officials moved away from directly purchasing the assets partly because they thought it would take too long to develop the right program and because they thought they needed to use the bulk of the rescue funds simply to keep banks alive. Those officials were widely criticized by lawmakers and investors for changing course so suddenly and creating uncertainty about the government's intentions.
Last fall, billionaire investor Warren E. Buffet, Goldman Sachs chief executive Lloyd Blankfein and William H. Gross, the managing director of PIMCO, the largest bond fund in the world, approached Treasury officials about an idea to create investment funds, using public and private money, to buy toxic assets from banks, according to former senior Treasury officials. Buffett is a director of The Washington Post Co.
The Obama administration further developed that proposal to address the two main problems banks are facing: troubled debt such as mortgages that institutions are holding until the loans are paid off, plus the complex securities and derivatives that were invented to finance those loans. Both types of assets -- the loans and the complex securities -- have fallen in value. Banks are stuck with them, hindering their ability to lend.