[Infowarrior] - New Treasury Toxic Asset Plan

[Richard Forno]

Treasury's toxic asset plan could cost $1 trillion

Mar 22, 5:03 PM (ET)

By MARTIN CRUTSINGER

http://apnews.myway.com/article/20090322/D973AFAO0.html

WASHINGTON (AP) - The Obama administration's latest attempt to tackle  
the banking crisis and get loans flowing to families and businesses  
will create a new government entity, the Public-Private Investment  
Program, to help purchase as much as $1 trillion in toxic assets on  
banks' books.

The new effort, to be unveiled Monday, will be followed the next day  
with release of the administration's broad framework for overhauling  
the financial system to ensure that the current crisis - the worst in  
seven decades - is not repeated.

A key part of that regulatory framework will give the government new  
resolution authority to take over troubled institutions that would  
pose a threat to the entire financial system if they failed.

Administration officials believe this new power will save taxpayers  
money and avoid the type of controversy that erupted last week when  
insurance giant American International Group paid employees of its  
troubled financial products unit $165 million in bonuses even though  
the company had received more than $170 billion in support from the  
federal government.

Under the new powers being sought by the administration, the treasury  
secretary could only seize a firm with the agreement of the president  
and the Federal Reserve.

Once in the equivalent of a conservatorship, the treasury secretary  
would have the power to limit payments to creditors and to break  
contracts governing executive compensation, a power that was lacking  
in the AIG case.

The plan on toxic assets will use the resources of the $700 billion  
bank bailout fund, the Federal Reserve and the Federal Deposit  
Insurance Corp.

The initiative will seek to entice private investors, including big  
hedge funds, to participate by offering billions of dollars in low- 
interest loans to finance the purchases. The government will share the  
risks if the assets fall further in price.

When Geithner released the initial outlines of the administration's  
overhaul of the bank rescue program on Feb. 10, the markets took a  
nosedive. The Dow Jones industrial average plunged by 380 points as  
investors expressed disappointment about a lack of details.

Christina Romer, head of the Council of Economic Advisers, said Sunday  
that it's important for investors to know that the administration is  
bringing a full array of programs to confront the problem.

"I don't think Wall Street is expecting the silver bullet," she said  
on CNN's "State of the Union.""This is one more piece. It's a crucial  
piece to get these toxic assets off, but it is just part of it and  
there will be more to come."

But private economists said investors may still have doubts about  
whether the government has adequate resources to properly fund the  
plan and whether private investors will be attracted to participate,  
especially after last week's uproar concerning the AIG bonuses, which  
has added to the anti-Wall Street feelings in the country.

Romer said the new toxic asset program would utilize around $100  
billion from the $700 billion bailout fund, leaving the fund close to  
being tapped out.

Mark Zandi, an economist at Moody's Economy.com, estimated that the  
government will need an additional $400 billion to adequately deal  
with the toxic asset problem, seen by many analysts as key to finally  
resolving the banking crisis.

Zandi said the administration has no choice but to rely heavily on  
government resources because of the urgency of getting soured real  
estate loans and troubled asset-backed securities off the books of  
banks so that they can resume more normal lending to consumers and  
businesses.

"This is a start and we will see how far it goes, but I believe they  
will have to go back to Congress for more money," he said.

The Public-Private Investment Program that will be created was viewed  
as performing the same functions - selling bonds to finance purchases  
of bad assets - as a similar organization did for the Resolution Trust  
Corp., which was created to dispose of bad real estate assets in the  
savings and loan crisis of the 1980s.

According to administration and industry officials, the toxic asset  
program will have three major parts:

_A public-private partnership to back private investors' purchases of  
bad assets, with government support coming from the $700 billion  
bailout fund. The government would match private investors dollar for  
dollar and share any profits equally.

_Expansion of a recently launched Fed program that provides loans for  
investors to buy securities backed by consumer debt as a way to  
increase the availability of auto loans, student loans and credit card  
debt. Under Geithner's plan for the toxic assets, that $1 trillion  
program would be expanded to support purchases of toxic assets.

_Use of the FDIC, which insures bank deposits, to support purchases of  
toxic assets, tapping into this agency's expertise in closing down  
failed banks and disposing of bad assets.

Some industry officials said hedge funds and other big investors are  
likely to be more leery of accepting the government's enticements to  
purchase these assets, fearing tighter government restraints in such  
areas as executive compensation.

Administration officials, however, insisted Sunday that a distinction  
needed to be made between companies getting heavy support from the  
bailout programs and investors who are being asked to help dispose of  
troubled assets.

Romer said the partnership with the private sector will help ensure  
that the government doesn't overpay for the toxic assets that it will  
be purchasing.

"This isn't just another handout to banks," she said on CNN. "We very  
much have the taxpayers' interest in mind."

The administration's revamped program for toxic assets is the latest  
in a string of banking initiatives which have also included efforts to  
deal with mortgage foreclosures, boost lending to small businesses and  
unfreeze the market for many types of consumer loans.

In addition, the nation's 19 biggest banks are undergoing intensive  
examinations by regulators that are due to be completed by the end of  
April to determine whether they have sufficient capital reserves to  
withstand an even more severe recession. Those that do not will be  
able to get more support from the government.

The overhaul of financial regulation will be revealed by Geithner in  
testimony he is scheduled to give Tuesday and Thursday before the  
House Financial Services Committee.

In addition to the expanded authority to seize big institutions that  
pose a risk to the entire system, the administration is also expected  
to offer more general proposals on limiting excesses seen in executive  
compensation in recent years, where the rewards prodded extreme risk- 
taking.

The regulatory plan is also expected to include a major change that  
gives the Federal Reserve more powers to oversee systemic risks to the  
entire financial system.

The administration is working to unveil its proposed regulatory  
changes in advance of a meeting of the Group of 20 economic leaders,  
which Obama will attend on April 2 in London. European nations have  
complained that lax financial regulations in the United States set the  
stage for the current financial crisis.