Treasury Works on 'Plan C' To Fend Off Lingering Threats
Wednesday, July 8, 2009
As the financial system tries to right itself after its near-collapse last fall, the Treasury Department has assembled a team to examine what could yet bring it down and has identified several trouble spots that could threaten the still-fragile lending industry.
Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.
Part of the mission is assessing which firms are the most vulnerable and trying to decipher what assets these companies hold and whether they pose a danger to the wider financial system. Plan C is a small-scale, relatively informal approach to a problem the administration hopes to address in the long term by empowering the Federal Reserve to oversee systemic risk.
The team is also responsible for considering potential government responses, but top officials within the Obama administration are wary of rolling out initiatives that would commit massive amounts of federal resources, said other sources in close contact with the administration. The sources spoke on condition of anonymity because the discussions are private. Instead, the administration thinks some ailing sectors of the credit markets should work out problems on their own, the sources said.
The creation of Plan C is a sign that the government has moved into a new phase of its response, acting preemptively rather than reacting to emerging crises, officials said.
"We are continually examining different scenarios going forward; that's just prudent planning," Treasury spokesman Andrew Williams said.
The officials in charge of Plan C -- named to allude to a last line of defense -- face a particular challenge in addressing the breakdown of commercial real estate lending.
Banks and other firms that provided such loans in the past have sharply curtailed lending.
That has left many developers and construction companies out in the cold. Over the next few years, these groups face a tidal wave of commercial real estate debt -- some estimates peg the total at more than $3 trillion -- that they will need to refinance. These loans were issued during this decade's construction boom with the mistaken expectation that they would be refinanced on the same generous terms after a few years.
The credit crisis changed all of that. Now few developers can find anyone to refinance their debt, endangering healthy and distressed properties.
General Growth Properties, which owns the Tysons Galleria mall in Northern Virginia, one of the most profitable shopping centers in the nation, filed for bankruptcy this spring after it could not roll over its loans. The John Hancock Tower in Boston, one of the city's most famous landmarks, was auctioned off after its owner defaulted on its debt.
"There's going to be a lot of these stories where people relied very heavily on this high-leverage cheap availability of debt," said Kevin Smith of Blackwell Advisors, a financial consultancy.