Treasury Dials Back Plan to Aid Banks
Thursday, July 9, 2009
The Obama administration's program to help relieve banks of their toxic securities, once touted by officials as critical to reviving the financial system, was instead unveiled yesterday as a modest safety net aimed at preventing the banking sector from suffering a relapse.
Treasury officials made the decision to scale back the program because they determined that banks no longer need such dramatic government involvement, officials said. But the initiative also ran up against considerable resistance from financial firms worried about the stigma of participating in a government bailout and the prospect that politicians could impose tough conditions.
Even Pimco, the massive bond fund that helped devise the original idea, said yesterday in a statement that it had decided not to participate "as a result of uncertainties regarding the design and implementation of the program." The long-delayed program will launch with a government investment of up to $30 billion to finance the purchase of as much as $180 billion in toxic securities, though government officials said a smaller total was likely.
When Treasury Secretary Timothy F. Geithner unveiled the department's troubled asset program four months ago, he said the Treasury could contribute up to $100 billion to two initiatives for buying up to $500 billion in toxic assets. The other initiative has been delayed indefinitely.
Banks hold vast quantities of toxic assets -- distressed residential and commercial mortgages and securities derived from those mortgages -- that they are reluctant to sell because investors are demanding fire-sale prices. But holding these toxic assets limits the ability of banks to make new loans.
The Treasury program detailed yesterday offers investors billions of dollars in cheap financing to buy toxic securities, which should allow these investors to offer banks higher prices for some toxic assets.
The program will not be big enough to clear away most of the toxic assets weighing down the books of banks. But with many firms recovering, officials now envision the initiative in part as a backstop. The program also is designed to foster an initial market for these assets and establish prices that can then be used as a reference by private investors.
"We're not trying to be the market. We're trying to jump-start the market," a Treasury official said.
Nine private firms have been selected to partner with the government and run the investment funds that will purchase toxic assets. These include a subsidiary of General Electric, one of the largest recipients of federal aid, and BlackRock, which the government already has tapped for several other roles.
The fund managers have to put in $20 million of their own money and each raise at least $500 million over the next 12 weeks. At that point, the program can finally begin.
The other firms selected by the Treasury are AllianceBernstein, Invesco, Marathon Asset Management, Oaktree Capital Management, RLJ Western Asset Management, TCW Group and Wellington Management. GE Capital Real Estate will participate as a joint venture with Angelo, Gordon & Co. These firms will partner with 10 small minority-owned and woman-owned financial services business, Treasury officials said.
Buying toxic assets was of paramount importance to government officials last fall when Congress approved the $700 billion bailout, dubbed the Troubled Assets Relief Program. But weeks after the measure became law, the Treasury decided to use most of the first installment of those funds to inject capital directly into banks. Once President Obama was sworn into office, Treasury officials again urged that buying toxic assets remained critical.
Separate from the securities derived from troubled loans, there are trillions of dollars in distressed residential and commercial mortgages on the balance sheets of banks, industry analysts said. But an effort led by the Federal Deposit Insurance Corp. to buy these loans was shelved last month because of a lack of interest from buyers and sellers.