Bank bailout: Get ready for next phase

Economy is getting worse and banks' books are still weighed down with junk. Washington is looking at new solutions that sound familiar.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Tami Luhby, CNNMoney.com senior writer

Tracking the bailout
Who's getting the bank bailout money
The government is engaged in an unprecedented - and expensive - effort to rescue the economy. Here are all the elements of the bailouts.

NEW YORK (CNNMoney.com) -- It's back to square one.

The deepening financial crisis, which is undermining the government's rescue efforts so far, is prompting federal officials to revisit its original bailout measures. These include taking toxic assets off institutions' balance sheets by moving them into a so-called "bad bank", according to published reports.

As long as these assets remain on banks' books, there's no telling how long their losses will continue and how deep they will be.

Addressing these assets was the original purpose of the Troubled Asset Relief Program, the formal name of the $700 billion bailout plan the Bush administration unveiled as the credit crunch spun out of control. It was later abandoned in favor of taking equity stakes in banks, which was seen as a more direct and rapid way to help.

But as the economy worsens and banks continue to rack up multi-billion dollar losses, the incoming Obama administration will face tough choices in deciding what to do with the $350 billion remaining in the bailout plan. There are many who want a piece of the pie, and there may not be enough money to go around.

David Axelrod, a top adviser to Obama, told Reuters that the administration, which takes office Tuesday, would make an announcement in "the next few days."

Figuring out the next phase

Outgoing Treasury Secretary Henry Paulson said Friday that "a lot of work" has been done on creating a "aggregator bank" and other ideas to leverage the remaining bailout funds to deal with banks' illiquid assets, according to reports. Such a "bad bank" might buy up financial institutions' bad assets, such as mortgage-backed securities, which could stem losses and help rebuild confidence. This is how the federal government first intended to address the credit crisis in mid-September.

Paulson also talked of having the Federal Reserve expand a program to back consumer credit, scheduled to begin next month, and of letting the Fed accept riskier assets, such as commercial mortgage-backed securities. Also, the government could expand its backstop of bank assets as it did for Bank of America, as well as Citigroup.

Meanwhile, Sheila Bair, head of the Federal Deposit Insurance Corp. who will remain in office under Obama, told the Wall Street Journal that federal agencies would like to have "something in place in the not too distant future."

"Everybody agrees it's important to provide some troubled asset relief, because I think it's key to getting private equity capital bank into banks," she told the Journal. "They need to have some certainty about what the tail risk is on some of these assets."

The bank, which would be capitalized with TARP funds, would be similar to the Resolution Trust Corp., which liquidated hundreds of savings and loans in the late 1980s and 1990s, Bair said.

On Tuesday, Fed Vice Chairman Donald Kohn voiced a similar view. And the congressional panel overseeing the TARP wrote last Friday in a report to Congress that events such as November's federal bailout of Citigroup highlight how the toxic asset problem has continued to fester.

Government officials are coming under renewed pressure from financial industry lobbyists, who are pushing them to do more to help banks deal with their bad assets.

"We need to get the markets moving again," said Tim Ryan, head of the Securities Industry and Financial Markets Association. "We have no problem with capital injections, but if you do capital injections without taking care of the bad assets, it just causes the problem to go into hibernation."

Bank losses mounting

The weakening economy is throwing a wrench into the government's efforts to aid the banks. As job losses mount, a growing number of consumers are falling behind on their mortgages, credit cards and other loan payments.

On Friday, Bank of America (BAC, Fortune 500), the nation's largest bank, reported a net loss of $1.79 billion in the fourth quarter of 2008, compared to earnings of $268 million a year earlier. Analysts expected earnings of 8 cents per share.

The loss did not include Merrill Lynch's results. The recently acquired investment bank reported a loss of $15.31 billion, or $9.62 per share. Bank of America cited "severe capital markets dislocations" for Merrill's huge loss, especially late in the quarter.

Citigroup (C, Fortune 500), meanwhile, reported a much bigger-than-expected $8.3 billion quarterly loss Friday, while the beleaguered banking icon also revealed plans to split up into two businesses.

A day earlier, JPMorgan Chase (JPM, Fortune 500) reported net income fell 76% to $702 million, or 7 cents a share during the fourth quarter, from $2.97 billion, or 86 cents a share, during the same period a year ago.

Losing the public's support

Convincing the American public to support more rescue measures may be tough.

A majority of those polled say the government's financial bailout for troubled banks has not worked so far and six in 10 don't want Washington to spend more money on the rescue, according to a CNN/Opinion Research Corporation survey released Friday.

President-elect Barack Obama will have to decide how to parcel out the remaining $350 billion to all the jockeying interests.

In a nod to congressional Democrats, Obama's officials have already committed to spending up to $100 billion on assisting homeowners facing foreclosure, while Federal Reserve Chairman Ben Bernanke said Tuesday that banks will need more capital injections.

However, Obama said it's crucial to help the banks and get them lending to consumers and small businesses again.

"There's no doubt that we needed to stabilize the banking system," Obama told CNN's John King Friday.

Fortune.com senior writer Colin Barr contributed to this report. To top of page

Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
50 years of the Ford Mustang Take a drive down memory lane with our favorite photos of the car through the years. More
Cool cars from the New York Auto Show These are some of the most interesting new models and concept vehicles from the Big Apple's car show. More
8 CEOs who took a pay cut in 2013 Median CEO pay inched up 9% in 2013 to $13.9 million. But not everyone got a bump last year. Here are eight CEOs who missed out. More
Sponsors

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.