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Saturday, March 21, 2009

Will Monday be the day to Revive U.S. Banks and the stock market ?

The Obama administration put the finishing touches on a plan to remove troubled assets from banks’ balance sheets that will be unveiled early next week.

Treasury Secretary Timothy Geithner intends to expand the Federal Reserve’s new $1 trillion Term Asset-Backed Securities Loan Facility to buy frozen assets, according to people familiar with the proposal. The revamped Fed program will sit alongside the Treasury’s planned public-private investment funds, while the Federal Deposit Insurance Corp.’s role will probably involve buying distressed loans, the people said.

“We’re going to move quickly to lay out a new financing program to deal with these legacy assets,” Geithner said in an interview with Bloomberg television at a meeting of Group of 20 finance ministers in Horsham, England, last weekend. “We have and expect to see a lot of support for this program.”

Geithner’s next step to cleanse banks’ balance sheets so they can start lending again will be crucial after the lack of detail in a rescue he outlined last month caused a sell-off in financial stocks. The initiative’s success will depend on the participation of financial institutions, some of whose leaders yesterday criticized congressional proposals to tax Wall Street bonuses.

Private investment managers would run the Treasury funds that purchase the toxic securities. The rollout of details on the toxic-asset plan slipped into next week as the Treasury Department grapples with the outcry over bonuses awarded by insurer American International Group Inc. AIG has received more than $170 billion in government aid.

Revamping TALF

As it’s currently set up, the Fed’s TALF program may lend as much as $1 trillion to investors from hedge funds and pension funds to insurance companies to buy recently created securities backed by loans for car purchases, college education and real estate.

Broadening the TALF to include older, illiquid and lower- rated securities could allow the participants in the public- private investment funds to potentially repackage assets and sell them on to a wider group.

The Fed’s policy-making committee, which met this week in Washington, said in its March 18 statement that the range of eligible collateral for the TALF “is likely to be expanded to include other financial assets.” The Federal Open Market Committee also pledged $1.15 trillion of extra measures to lower borrowing costs, including purchases of long-term Treasuries.

The TALF is supported with money from the $700 billion bank-rescue fund passed by Congress in October. The Bush administration originally set aside $20 billion to seed $200 billion in loans; Geithner has proposed raising the government contribution to $100 billion. The facility could need additional money to address so-called legacy assets.

FDIC’s Role

The FDIC’s role will likely also expand to help finance the administration’s initiative, and may run an aggregator-type unit that would purchase whole loans -- those not packaged into other securities -- three people said. FDIC officials have extensive experience dealing with nonperforming loans from their role in taking over failed banks. Under one scenario discussed, the FDIC would attach a government guarantee to the assets and then sell them to investors.

Treasury spokesman Isaac Baker declined to comment. Details of the plan could still change. “The markets are just getting increasingly nervous, the longer they wait to announce the plan,” said Stephen Myrow, a former Treasury official in the Bush administration who helped create the TALF.

Recession Impact

American banks have suffered more than $800 billion in writedowns and credit losses since the market for subprime mortgages collapsed in 2007. The credit crisis that followed pushed the economy into the deepest recession since 1982. A surge in unemployment and collapse in house prices has added to bad loans and further discouraged banks from lending.

The crisis pushed the U.S. government into pouring billions of dollars into financial institutions, including Citigroup Inc., Bank of America Corp. and AIG.

President Barack Obama has ordered Geithner to “pursue every legal avenue” to recoup money distributed to employees in an AIG unit that sold credit-default swaps and whose bad bets helped touch off the financial crisis.

Bank of America Chief Executive Officer Kenneth Lewis called a proposed tax on bonuses “unfair” in a memo to employees yesterday, while Citigroup CEO Vikram Pandit said his bank is “working in every appropriate way with policymakers.” JPMorgan Chase & Co. CEO Jamie Dimon held a conference call with about 200 executives, saying the firm is concerned about retention and is working with lawmakers.

Outcry in Congress

The banks are responding to an outcry in Congress over $165 million in bonuses paid by AIG after the insurer received $173 billion in federal bailout funds. The Senate will vote next week on levies on bonuses after the House of Representatives approved a 90 percent tax on bonuses at companies that received bailout funds.

“People are very anxious about this getting too widespread, this notion that no one on Wall Street or in banking deserves any money,” said Seamus McMahon, a consultant with Booz & Co. in New York, who works with financial firms.

The Treasury secretary disappointed markets and lawmakers when he didn’t provide many specifics about the distressed asset clean-up in his Feb. 10 unveiling of the administration’s approach.

Stock Rebound

The Standard & Poor’s 500 Financials Index slumped 11 percent that day. It has since advanced about 12 percent after statements from banks including Citigroup and Bank of America that earnings accelerated since the start of the year.

Still, the index has retreated the past two days as legislators worked to increase restrictions on executive pay. The Fed said earlier this month that existing pay limits wouldn’t apply under the TALF program.

Opening the TALF to legacy assets “is the most effective and efficient way to purge troubled assets from the financial system,” Myrow said. To guard against losses the Fed would take so-called haircuts, or discounts on the loans, for the collateral it accepts.

It’s not clear when Obama will need to ask Congress for more money to continue to fund the bank-rescue program. Most of the $700 billion has already been allocated to existing programs.

“We’re talking about big numbers here,” said Kevin Petrasic, a former official at the Office of Thrift Supervision, who is now a lawyer at the Paul, Hastings, Janofsky & Walker law firm in Washington. Congress is still “smarting” from having to dole out for saving Wall Street, he said.
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