Tuesday, February 10, 2009

Geithner Unveils Rescue Plan, but Details Are Scarce

By MAYA JACKSON RANDALL and MICHAEL CRITTENDEN WASHINGTON--The Obama administration Tuesday announced a wide-ranging financial sector rescue plan that could send $2 trillion coursing through the financial system. View Full Image The plan, which is designed to involve a mix of government and private capital, aims to stabilize the U.S. financial system by injecting capital into banks, helping to determine prices of toxic assets weighing on firms' balance sheets and stemming foreclosures. "We believe that the policy response has to be comprehensive and forceful," Treasury Secretary Timothy Geithner said in his speech Tuesday. "Instead of catalyzing recovery, the financial system is working against recovery. And at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it." But critical details of the plan remained unanswered, despite the weeks of planning leading up to Tuesday's announcement. Mr. Geithner said the plan to stem foreclosures would be announced in coming weeks. He also provided few details of the asset-purchase plan, which is designed to be done in partnership with the private sector. The absence of detail speaks to the thorny issues that lie at the heart of the financial crisis: how to value the toxic assets causing banks to report losses and how to shuffle aid to homeowners and stem the rise of foreclosures. Many of the potential solutions come with a host of fresh problems, which Obama officials have grappled with much as their predecessors did. The stakes are high for Mr. Geithner and the financial system. The administration pitched this speech as a way to restart the troubled bailout, which has come in for heavy criticism by lawmakers and the Congress for aiding banks on terms that were too easy and for not doing enough to restart lending. As part of the administration's broad plan, the Federal Reserve Tuesday announced that it stands ready to dramatically expand a program to boost consumer lending so that it can also help jumpstart the mortgage market. Treasury plans to put $100 billion toward the Fed's Term Asset-Backed Securities Loan Facility, or TALF, as a way to leverage up to $1 trillion. Additionally, Mr. Geithner announced plans for a public-private investment fund that would help make financing available to "help leverage private capital to help get private markets working again." The program will be targeted to the legacy loans and assets that are now burdening financial firms, he said. "By providing the financing the private markets cannot now provide, this will help start a market for the real estate related assets that are at the center of this crisis," he said. "Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets." Mr. Geithner added that the administration is still exploring a range of options for setting up the program and it will seek input from the public on how to design it. While the program will ultimately provide up to $1 trillion in financing capacity, it will start off on a scale of $500 billion. Mr. Geithner presented the moves as a multi-pronged effort to encourage financial institutions to lend again. The administration's goal is to unfreeze dysfunctional credit markets that have dragged the economy into a recession. He also announced new conditions on banks receiving aid, including documenting how the money is helping to generate new loans. Many U.S. banks will be subjected to rigorous examinations to see if they are healthy enough to lend before receiving additional financial aid. The move could address disagreements between bank regulators about the viability of scores of institutions. Regulators have struggled to come up with a common set of criteria for deciding which banks should receive money. Setting up a stress test could create a more objective set of standards, which might reveal the depths of the industry's problems. The administration is still finalizing details of its a housing plan, which centers on financial incentives for mortgage companies to modify bad loans. Mr. Geithner said the goal is to "help bring down mortgage payments and to reduce mortgage interest rates." The Obama administration has discussed spending $50 billion to create programs to help roughly 2.5 million people avoid foreclosure in the next few years through a number of measures aimed at lowering monthly payments and making it easier for borrowers to modify loans. Government officials are expected to create national standards for loan modifications that would be adopted by Fannie Mae and Freddie Mac. They are also expected to use tax dollars to incentivize servicers to modify loans and possibly offer a separate incentive to MBS investors who own securities backed by the loans. A key focus has been on how to determine the "net present value" of homes, and government officials believe if they can agree on a common metric for determining a home's value, they can rapidly expedite how mortgages are modified. —Damian Paletta contributed to this article. Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com and Michael Crittenden at michael.crittenden@dowjones.com

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