Bank bailout postponed until Tuesday
Treasury Secretary Tim Geithner will unveil the eagerly-awaited announcement of the TARP overhaul a day later than planned in order to focus on stimulus.
NEW YORK (CNNMoney.com) -- The "massive overhaul" of the banking bailout will be announced a day later than expected.
Treasury Secretary Timothy Geithner was originally scheduled to give full details about the changes to the rescue plan in a speech midday Monday. But the Treasury Department said Sunday that the plan will be announced Tuesday instead, in order for Geithner to focus on the stimulus bill that is being debated in the Senate.
"With record high job losses, and weakening economic forecasts, we're focused on working with Congress to pass an economic recovery bill so we can create the jobs and make the investments necessary to get our economy moving again," said Treasury spokesperson Isaac Baker in a statement. "Economic officials administration wide will be working and consulting with senators throughout the day."
"The economic recovery plan is critical to stemming the tide of this economic crisis. But, it alone won't solve all the problems that led us here," Baker added. "We need to stabilize and repair our financial system to maintain the flow of credit that families and businesses depend on to keep our economy strong. The plan that Secretary Geithner lays out on Tuesday will achieve that goal."
Details of the plan are still not certain. But Geithner has promised radical changes to the Troubled Asset Relief Fund, or TARP, created last fall to shore up the deteriorating finances of the nation's banks.
So far, the government has used the first half of $700 billion TARP funds to inject capital into more than 300 banks, to make additional large investments in AIG (AIG, Fortune 500), Bank of America (BAC, Fortune 500), Citigroup (C, Fortune 500), and to lend money to General Motors (GM, Fortune 500) and Chrysler.
Now Geithner needs a plan for the second slice of $350 billion.
The strategy thus far has come under attack for a number of reasons.
It is not clear how the Treasury Department decides which banks get loans. Banks are hoarding their new funds, rather than making loans. Direct investments and loans do not address the core problem of establishing transparent pricing for the so-called toxic assets rotting on bank balance sheets. And there has not been enough attention given to stemming the tide of foreclosures, a key mandate of the TARP legislation.
Though it was not yet certain what alternatives Geithner would pursue, these are the options under review.
'Bad Bank': The prospects for the creation of a so-called "bad bank" have gone back and forth in recent days. A government-funded "bad bank" would buy toxic assets from bank balance sheets. But there are many hurdles.
For example, how much would the government pay for those assets -- pay too much, the taxpayer takes a hit; pay too little, and the banks do. Plus, many analysts believe that to be truly effective, a "bad bank" would need far more money than is available.
However, the Wall Street Journal reported Saturday that Treasury may use private sector money for the bulk of the financing. And speaking on "Fox News Sunday", top White House economic aide Larry Summers said Geithner believes he can bring "substantial private capital" to the plan.
Insuring assets: The Treasury Department has already done this for Citigroup and Bank of America. Here's how the Citi arrangement -- announced last fall - works, for example: Citi is on the hook for the first $29 billion in losses on the covered assets, which includes mostly loans backed by residential and commercial mortgages. Citi covers 10% of losses above that amount, with the government shouldering the rest.
In a bailout scheme announced last month, the United Kingdom used the same approach.
Such a plan helps ease the pain on banks, but will not force the banks to fully recognize the extent to which assets their holding have lost value -- an important step in the recovery process.
Fed financing for private investors: Though government assistance is needed, few think the government should take the lead in pricing assets and controlling banks. That's a job best done by private investors, such as hedge funds. But with credit markets frozen, these investors can't get financing to buy toxic assets -- this is where the Federal Reserve may step in.
The Fed announced the Term Asset-Backed Securities Loan Facility (TALF) last fall as a vehicle to lend money for the purchase of an array of securities backed by consumer loans like credit-cards and student loans. The Fed could expand the TALF to jumpstart the private market for bad real estate loans.
One question mark hanging over this concept is how willing the banks will be to sell toxic assets at the market prices. If the newly established market prices are below the prices at which the banks have marked the assets on their balance sheets, the banks could face more writedowns -- which could force the government to pour in even more capital.
Debt/equity swaps: Geithner could also require that debt holders in banks needing assistance "swap" their stake for stock. Existing shareholders would be wiped out and current creditors would give up some of their debt claims in exchange for ownership of the restructured firm. In addition to being fairer, swapping debt for equity would reduce the amount of debt weighing on the economy.
More bank injections: This idea isn't dead yet. Banks still need capital, and TARP fund still has some cash. Treasury may make more direct investments, though they would surely come with more strings attached, such as a requirement that banks boost lending, for example.
Stemming foreclosures: President Obama has said he wants to set aside between $50 billion and $100 billion to address the foreclosure crisis. How the money will be spent is unclear. FDIC chair Shelia Bair has advocated a plan that would capping monthly payments at 31% of the borrowers' gross income, and have the government share losses with lenders should homeowners that get help end up re-defaulting.
In an interview with CNN this weekend, Shaun Donovan, the Secretary of the Department of Housing and Urban Development, stressed that limiting foreclosures will be key to solving the crisis in the housing market and broader economy.
And late Friday, Sen. Chris Dodd, D-CT, said the Senate approved his amendment to the stimulus plan that would require the Treasury Department to spend at least $50 billion in funds from the bank bailout on a loan modification program.
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