A nagging question remains as the world awaits the debut of the second version of the Troubled Asset Relief Plan: Precisely what assets will be included in the bank rescue effort?
As was the case with the previous administration, President Barack Obama and his new Treasury Secretary Timothy Geithner have struggled with how to craft a solution that won't leave taxpayers on the hook but will finally loosen the logjam in the credit markets and restore the banking system's health.
The initial focus was on securities underpinned by mortgages, whose plummeting values have forced banks to take severe write-downs, which in turn has forced them to turn to private investors and ultimately the government for fresh capital.
That doesn't address what is expected to be a tsunami of defaults across all categories of consumer loans as rising unemployment (the jobless rate reached 7.6% in January) takes its toll. Bankers acknowledged last month that consumer loan defaults will rise through this year, causing more losses beyond the damage already inflicted by mortgage-backed securities.
Bad loans from defaults in consumer loans that are currently being repaid could be addressed by a plan to expand the Federal Reserve's Term Asset-Backed Securities Loan Facility. That program, in which newer consumer asset-backed loans can be pledged to the Fed as collateral for Treasury securities, was created in the fall as a way to help the struggling automakers continue to make new auto loans.
Federal guarantees on newly issued asset-backed securities could be enough to attract the private investor capital that would unclog the lending pipeline. The expansion of TALF could include guarantees on privately issued mortgage-backed securities, meaning those not issued by
Another way around it is to extend the Federal Deposit Insurance Corp.'s bank debt guarantee program from three years to well beyond that. That would help banks continue to underwrite mortgages that don't conform to the limits under Fannie and Freddie.
Still, none of that would address the good loans about to go bad because of rising unemployment. A federal guarantee of older loans considered to have a reasonable chance of recovery may help partly. Howard Glaser, an adviser to the Clinton administration and paid consultant to Fannie and Freddie, says he expects $50 billion to $100 billion of TARP funds to be used for an insurance reserve fund at the Fed.
Regulators have been scrambling for answers, but the previous administration--and Treasury Secretary Henry Paulson in particular--was criticized for waffling on whether to buy assets from banks or inject capital into them, or both. The asset purchase plan was too difficult to pull off effectively since many of the securities are hard to value. The capital injection plan included double-dips by
Some details of Geithner's plan leaked out over the weekend, but the emerging outlines of the program are still murky. Originally scheduled to be announced Monday, the program will be unveiled Tuesday to give the Obama administration time to wrap up the other big item on its immediate agenda: the economic stimulus package. (See "Washington's Trillion-Dollar Week")
Geithner isn't expected to ask for more money yet. The original $700 billion TARP, now more than half spent, has been controversial, with many saying it is simply a big sinkhole of taxpayer money.
Touring the Sunday morning talk shows, Obama economic adviser Lawrence Summers explained, "We are going to solve it by being as effective and strategic as we possibly can in the use of public money so as to catalyze and spur private investment."
The government has been weighing funding a "bad bank" to buy troubled assets and giving private investors loss-sharing arrangements. Part of the new plan is also expected to include guarantees of loans that banks continue to hold on their books. Citigroup and Bank of America already have such guarantees on more than $400 billion of assets between them.
Geithner's new plan is also expected to include more government purchases of bank equity, with strings attached, including loan modification programs.
Glaser said in a weekend e-mail that the Geithner plan "can't possibly please analysts who are themselves deeply split over questions of valuation, whether a guarantee or removal from the bank is the best course, and the balance between stepping up lending and improving capital positions. But by rolling out a sweeping multipronged approach, the Geithner strategy will stand in contrast to the often ad-hoc 'we're making it up as we go along' Paulson plans."
