Treasury wants private help Government to seek private-sector investments to help bail out banks
Treasury wants private help
Government to seek private-sector investments to help bail out banks
Obama's chief economic advisor Lawrence Summers says new measures by the Treasury will include creating incentives for the private sector to invest in troubled banks. Announcement of details delayed to Tuesday.
Summers says private capital key to bank bailout
Treasury postponing new financial rescue plan announcement to Tuesday
By Ronald D. Orol, MarketWatch
Last update: 3:06 p.m. EST Feb. 8, 2009Comments: 261WASHINGTON (MarketWatch) -- A key Obama administration official said Sunday that new, soon-to-be-announced financial measures by the Treasury will include creating incentives for the private sector to invest in troubled banks.
"It can't all be private capital, but with the right kinds of government guarantees and the right kinds of financing, strategic approaches, [Treasury Secretary Timothy] Geithner believes we can bring in substantial private capital," said Obama's chief economic advisor Lawrence Summers on Fox News Sunday.
One measure the Treasury is considering would create a "bad bank" or "aggregator bank" that would buy illiquid mortgage securities. It would be partly funded by some of the remaining money from the existing $700 billion Troubled Asset Relief Program fund, but the majority of the funds would come from the private sector, according to a Wall Street Journal report Sunday.
In addition to the creation of a bad bank, the Treasury plans to guarantee mortgage securities, provide new capital injections into financial institutions, help out troubled homeowners on the verge of foreclosure and expand a consumer lending program.
Geithner was scheduled to propose a "comprehensive" financial rescue plan Monday, but a Treasury statement Sunday said the announcement of such a program won't take place until Tuesday.
Summers said Obama and his team are instead concentrating on completing a massive stimulus package that is being debated in the Senate. "The desire right now is to keep the focus right now on the economic recovery program," Summers said. See full story on stimulus package.
Geithner's expected proposal to make new capital infusions into struggling banks would be an extension of an existing program, but it would come with subtle variations intended to include private capital.
As of Jan. 23, the Treasury had allocated $294 billion of the bailout funds, most of which went to buy large minority stakes in 317 financial institutions.
The Treasury is reportedly considering using a chunk of the remaining $350 billion in bank bailout funds to make capital injections using a form of preferred security that would pay interest like bonds but would be convertible into common shares after a set period of time, perhaps seven years.
Banks would have an incentive to buy out the government's stake before the conversion because once they become common shares the investment would dilute existing common shareholders, lowering the value of the bank's shares.
So far, the Treasury's capital injections into banks have mostly been in the form of preferred shares and warrants for preferred shares that pay out dividends.
With the existing program participating banks must pay Treasury a dividend at a rate of 5% a year for five years, after which the dividend rises to 9%. This dividend step-up is an existing incentive for banks to buy out the government's stake within five years.
The Treasury Department also is expected to use between $50 billion and $100 billion of the bank bailout program to fund a mortgage-mitigation proposal to help troubled homeowners avoid foreclosure.
"The president has made clear that he's committed to foreclosures. It will be $50 billion or more to support our housing economy," Summers said Sunday on ABC's "This Week."
Senate Banking Committee Chairman Christopher Dodd, D-Conn., said last week that an approach introduced by Federal Deposit Insurance Chairwoman Sheila Bair was "gaining traction."
Bair has proposed using $22.4 billion of the remaining funds in the bank bailout package in a program to help avoid foreclosures. It is a loss-sharing program between mortgage servicers or investors and the FDIC and deals with loans that fail six months or longer after being modified.
The Treasury may also provide additional guarantees to banks in a program that could expand an approach set up by the FDIC. The FDIC previously launched a scheme to guarantee some bank debt up to three years. In January, it also announced a program to guarantee certain bank debt for up to 10 years.
Rep. Mike Pence, R-Ind., said Sunday on NBC's "Meet the Press" that he understood that a key part of Geithner's upcoming program will involve allowing banks to pay a premium to the government in exchange for insurance.
Pence said he was surprised by the plan because a group of Republican lawmakers in October -- including Rep. Eric Cantor, R-Va. -- had also proposed such an approach as an alternative to using federal funds to recapitalize the banks.
"We proposed that last October and were told that it would never work. Now its going to be a centerpiece of the plan," Pence said.
The statute setting up the bank bailout package that was approved by Congress in October provided Treasury with the authority to set up an insurance program for bank assets, in addition to allocating government funds for them.
Another scheme that may reportedly be expanded is a Federal Reserve program that seeks to encourage the consumer loan market by providing cash infusions to investors purchasing consumer-loan securities.
So far, the program -- known as the Term Asset-Backed Securities Loan Facility -- uses $20 billion in funds from the bank bailout money to contribute to an overall $200 billion program to revitalize the consumer-loan market for credit cards, student loans and automotive loans. The rest of the funds currently come from the Federal Reserve, but both the Fed and the Treasury may later add to the program, reports said.
Republican lawmakers have raised concerns about the pending Geithner announcement.
"This just seems to be more of the same," said Pence. "More taxpayer dollars is being shoveled from Main Street to Wall Street."
Ronald D. Orol is a MarketWatch reporter, based in Washington.