1st steps on U.S. rescue plans
Treasury official outlines plans - including equity stakes and purchase of assets. Wall St. chiefs to meet with officials Monday.
NEW YORK (CNNMoney.com) -- A top Treasury official on Monday outlined the government's multi-prong effort to bail out the United States financial system and resuscitate the economy.
Neel Kashkari, interim assistant secretary for financial stability, offered few details on how the plan will be carried out. But Treasury and Federal Reserve officials are set to meet Monday afternoon with top finance industry executives to finalize details, a Treasury spokeswoman said.
Using authority granted in the $700 billion rescue plan passed by Congress 10 days ago, the Treasury Department is moving on five fronts. The steps include:
- purchasing troubled mortgage-backed securities;
- buying mortgages, particularly from regional banks;
- insuring mortgage-backed securities and mortgages, ensuring banks and investors don't lose money if borrowers default;
- purchasing equity in a broad array of financial institutions; and
- helping delinquent borrowers stay in their homes.
"Treasury is implementing its new authorities with one simple goal - to restore capital flows to the consumers and businesses that form the core of our economy," said Kashkari, speaking in Washington, D.C., before the Institute of International Bankers.
The meeting on Monday afternoon will include Wall Street's top chief executives: Kenneth Lewis of Bank of America; Jamie Dimon of JPMorgan Chase; Lloyd Blankfein of Goldman Sachs Group; John Mack of Morgan Stanley; and Vikram Pandit of Citigroup, according to The Wall Street Journal.
In his speech, Kashkari largely reiterated the administration's stance on propping up the nation's financial institutions, brought to their knees first by the mortgage meltdown and then the worldwide credit crunch. The tools will be deployed "as soon as they are ready," he said.
Meanwhile, Treasury is hiring executives and staff to lead the effort, he said. Law firm Simpson Thacher will advise the government on structuring the equity program, while advisory firm Ennis Knupp & Associates will act as investment management consultant. Ennis Knupp will be paid $2.5 million, according to a contract released by Treasury on Monday.
Markets around the world are nervously awaiting details on how the United States will implement the rescue plan. Its passage on Oct. 3 did little to calm jittery investors. Last week, the Dow Jones industrial average had its worst week ever, falling just over 1,874 points, or 18%. World markets also crumbled.
Emergency steps taken this weekend by world leaders has eased some fears. The Dow soared more than 475 points Monday morning, after world markets moved higher.
As the credit crisis deepens, administration officials find they have to take an ever greater role in righting the nation's financial system.
Last week, they revealed plans not only to buy troubled assets but take equity stakes in banks. By buying shares, the government would give financial institutions much-needed capital to shore up their balance sheets.
The Bush administration was initially reluctant to take such a step, preferring instead to help stabilize the financial system by buying troubled mortgage assets. But after the rescue plan's passage failed to ease the credit crisis, officials realized more needed to be done.
In yet another move to inject liquidity into global markets, the Federal Reserve announced Monday that it will offer an unlimited amount of dollars to three other central banks. In the unprecedented action, the U.S. central bank will lend dollars at a fixed interest rate to the central banks of England, Switzerland and the European Union, according to a joint statement from the banks.
The original thrust of the bailout plan - to purchase troubled mortgage-backed securities - was woefully inadequate, experts said. Injecting capital into the banks is a faster fix and would be more likely to jumpstart lending and to restore confidence in the institutions.
Banks need to have adequate capital on hand to support their assets, which include loans. Massive writedowns of their mortgage-backed assets have sent institutions scrambling to raise capital from private sources. But such funds have been hard to come by since the banks' precarious positions - made worse by high-profile blowups such as Lehman Brothers - have made investors wary.
But the government must be selective in the banks in which it invests, said Joseph Mason, professor of banking at Louisiana State University. Keeping insolvent banks alive will only drain resources and do little to right the economy, he said.
While many will likely complain about the selection process, regulators are inside banks and know which ones have the best chance of survival, Mason said.
"Their job is to call the winners and losers in this type of environment," he said.
Though they say the capital injection plan will be wide-ranging, Treasury officials acknowledge it won't be available to everyone.
"One thing we must recognize ... some financial institutions will fail," Treasury Secretary Henry Paulson said Friday. "The [program] doesn't exist to save every financial institution for its own sake."
The United States is not the only government doling out dough to its banks. With the crisis engulfing nations around the globe, European governments are also planning to buy stakes in their banks and take other steps in a desperate measure to get financial institutions lending to one another.
The British Treasury announced early Monday it will invest $63 billion in the Royal Bank of Scotland, HBOS and Lloyds. Germany, France and Spain soon followed with similar moves.
The leaders of 15 European nations agreed Sunday to a wide-ranging plan to invest in their financial institutions and to guarantee inter-bank lending, said French President Nicolas Sarkozy.
"We want to give ... banks the means to lend, to support the economy to enable households to borrow for mortgages or consumption and give companies the means necessary to invest for growth," said Sarkozy, who also holds the rotating European Union presidency.
The 15 nations also said they would protect individual depositors' accounts and move to ease accounting regulations that determine how assets are valued, removing a requirement that they be based on market prices - so-called "mark-to-market" accounting.
Other countries, including Australia and United Arab Emirates, also took steps to restore confidence in their institutions.
The announcements come after weekend meetings of finance officials from the Group of Seven, Group of 20 and the International Monetary Fund. Leaders vowed to help stabilize economies around the world.