Geithner’s Bank Rescue May Emphasize Guarantees Over ‘Bad Bank’
By Rebecca Christie and Alison Vekshin
Feb. 6 (Bloomberg) -- U.S. Treasury Secretary Timothy Geithner’s strategy to aid the nation’s banks will likely emphasize guarantees of toxic assets over proposals to create a so-called aggregator bank that would remove them from balance sheets, according to people familiar with the plan.
The government guarantees, which might be modeled on those already given to Citigroup Inc. and Bank of America Corp., may be coupled with the purchase of preferred shares in the banks that would be later convertible into common stock, some of the people said. The aggregator bank or ‘bad bank,’ has lost favor, in part because the potential costs involved, they added.
“Our agenda is to begin to shape the architecture of a financial recovery plan that’ll help get credit flowing again,” Geithner said before a meeting yesterday with Federal Reserve Chairman Ben S. Bernanke and other members of the President’s Working Group on Financial Markets. Geithner will announce the plan on Feb. 9.
The Obama administration has its work cut out for it. U.S. banks have already racked up $745 billion in credit losses and have warned of more to come. Shares of Bank of America, the country’s largest bank, touched a 24-year low yesterday amid concern it would be taken over by the government. The stock recovered to end the day 3 percent higher at $4.84.
The risk is that the administration’s measures will fall short of what some experts say is required to restore confidence in the financial system and get credit flowing again. Nouriel Roubini, a professor at New York University, has predicted that U.S. losses may ultimately reach $3.6 trillion.
Advocate of Action
Another advocate of dramatic action is Harvard University economist Jeremy Stein, tapped to join the White House’s National Economic Council under director Lawrence Summers.
Stein, in a September op-ed piece in the New York Times, advocated that the government act as a “deep-pocketed private investor that sees a bargain buying opportunity -- Warren Buffett on steroids” to snap up the toxic assets. He’s also called for the government to conduct tough audits of the banks and to force those who are found insolvent to close or merge.
Such a dramatic strategy isn’t likely this time, the people said. The administration, smarting over the fight in Congress over its $800 billion plus economic stimulus plan, is wary about asking lawmakers for more money now for the banks, according to some of the people.
That’s one reason why the administration looks to be backing away from setting up a giant aggregator bank to buy up the assets and at most may settle on a smaller version of that, they added.
Housing Initiative
Less than $350 billion is left to be allocated in the $700 billion bailout fund lawmakers approved last October. The administration has already pledged to use $50 billion to $100 billion of the remainder to stem a surge in home foreclosures.
The discussions on the financial rescue are fluid and will probably continue at least through tomorrow, the people said.
Banks are also pressing for the plan to include a temporary easing of mark-to-market rules that require them to reduce the value of assets they hold. The firms maintain that at least some of the assets are not that impaired, arguing that investors are being too pessimistic about their ultimate value.
Senate Banking Committee Chairman Christopher Dodd said on Feb. 3 that such a change might be needed, although he made clear yesterday that he isn’t convinced. “I haven’t embraced it yet,” the Connecticut lawmaker told reporters, adding that he intended to discuss the idea with Geithner.
Stimulus Debate
Geithner told reporters yesterday that the financial rescue package would be designed to “reinforce the recovery and reinvestment plan now working its way through Congress.”
The House has already passed an $819 billion version of the plan, while the Senate is still working on its own amidst opposition among Republicans and some fiscally conservative Democrats to the high price tag.
President Barack Obama told reporters flying with him on Air Force One that it was “important to make sure that the recovery package is of sufficient size to do what’s needed to create jobs. We lost half a million jobs each month for two consecutive quarters and things could continue to decline.”
A Labor Department report today may show that employers cut 540,000 positions in January, with the unemployment rate rising to a 16-year high of 7.5 percent, according to the median estimates of economists surveyed by Bloomberg News.
“The turn for the economy is nowhere in sight,” said Carl Riccadonna, a senior U.S. economist at Deutsche Bank Securities Inc. in New York.
To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net
Last Updated: February 6, 2009 00:01 EST |
