February 9th, 2009
02:41 PM ET

Bank plan postponed until Tuesday

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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.

Filed under: Bailout Turmoil • Economy • Raw Politics
soundoff (7 Responses)
  1. Barb -in PA

    Here's a stimulus package idea – why cant the govt allow every registered driver in the US $1000 or $2000 plus a low interest loan to buy a car – the car industry sells cars, the American public gets a chance to get a new or dealer-used car, the money gets into the economy right away, and the banks get going with new loans/credit, which are backed up w/ a govt -guarantee. That would be alot cheaper than the bailouts that gave money to the automakers – for what exactly??

    February 9, 2009 at 9:36 pm |
  2. Annie Kate

    I thought Obama said in his campaign that his administration would be able to multi-task. So why the delay on the TARP amendments – is it just Geithner that can't multi-task or is multi-tasking defined differently in Washington?

    February 9, 2009 at 7:41 pm |
  3. Lisa in CA

    @Andrew, while I am in favor of your ideas, those of us who would like to continue to pay our mortgages, credit card payments, etc. and also buy things, i.e., stimulate the economy, are also left out - the difference is we no longer have jobs. Seriously, with this job "stimulus", who is going to hire someone over 40 (I don't care about the anti-age discrimination – it takes place) at a higher salary when they can hire a newby at half the rate? Meanwhile, we've worked many years and have been good about paying our bills and we get screwed as well. What do we do now? Don't penalize us, either.

    Again, the government is once again trying to do everything with one bill - and that just simply is not possible. They have to break it into stages; and with each stage, make sure the benchmarks of the previous stage have been met before putting more money out.

    The problem, though, is that the "experts" (who do appear to be a vaguely familiar part of the "good ole boy network") have no experience in what the real people down here are living. What is happening to us isn't happening and won't happen to them. Thus, they don't get it and as such, really don't know how to fix it.

    February 9, 2009 at 6:21 pm |
  4. Andrew

    It is disgusting to see financially responsible American homeowners, a 90% majority, completely ignored in discussions about economic / financial policy. I pay my mortgage on a $720K home in San Jose, CA, now appraised at $550K, on-time every month at 6.35% interest. Under current policy discussions I have no options to free up cash-flow to help the economy while I sit back and watch how we are trying to "band-aid" home price declines by bailing out those who can't afford their houses. What an irony, we are spending tax payer money to help those who on the back-side provide no upside to economic stimulus at the same time pose high-risk to future default! 1) Home prices are not the problem, we need to let free-market economics determine home prices and this will be buoyed when the economy recovers 2) The majority of Americans who still have jobs and pay their mortgage are the answer. The problem is the banks are taking all the cash-flow (my $3800 a month interest only) at high interest rates while tax payers continue to pump free money into the banking black-hole! Wake Up Government! Ignore my equity value, back my loan at 4%, free-up some cash-flow and I will return the favor by purchasing goods and services in the economy...as with the MAJORITY of Americans in my situation! HELLO!? The BANKS are hoarding free stimulus money while keeping their suckers on the "good" cash-flows at high interest!!!

    February 9, 2009 at 5:32 pm |
  5. JC- Los Angeles

    It now appears that Timothy Geithner, of tax evasion fame, seems compelled to bring in private investors to help buy toxic mortgage assets.

    I'm sure little Timmy is trying to line up his good old boy network since he feels there's money to be made off taxpayers and the government.

    It's the height of hypocrisy to allow Geithner to round up the usual suspects when Wall Street and it's culture of corruption contributed mightily to the downfall of America.

    It's as if Timmy and his friends want to get paid twice; they made a killing off the mortgage fraud and now want to get paid again on the toxic waste they left behind.

    Only in America.

    February 9, 2009 at 4:32 pm |
  6. Lisa in CA

    You want to get the economy moving? Mandate a temporary drop in all interest rates. That puts money immediately into my pockets - not while I wait for a job to miraculously be created. Better yet, mandate that banks forgive all school, credit card and business loans. That frees up money again in my pocket so that I can buy, which stimulates the economy thus creating the need for items thus creating the need for jobs.

    If the banks/financial institutions are getting more of my money, then they need to be told they have to make sure it gets returned to me. A drop in interest rates, or 0% interest rates for a set number of years, would be a nice start.

    Any further "stimulus" needs to start at the bottom. I guarantee that with our "keeping up with the Joneses" mentality and our need to have the latest gadget immediately, the economy will indeed benefit. Unfortunately, we need to have the money in our hands, not hope the banks will be gracious enough to lend it to us.

    February 9, 2009 at 4:15 pm |
  7. jarrod

    it seems that the treasury plans change its mind after this simulus plan is voted on which means something that is in debate with stimulas plan doesn't go through it is going to directly affect the the tarp money and how it is dispuresed.......Something smells funny here

    February 9, 2009 at 3:22 pm |