Geithner tackles ‘legacy assets’

Washington Post Editorial: Mr. Geithner's Plan - There are no guarantees, but what he's come up with to deal with banks' toxic assets is worth a try.
Copyright by The Washington Post
Tuesday, March 24, 2009; Page A12
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR2009032302794.html


JUST A MONTH or so ago, the stock market plunged because investors did not like Treasury Secretary Timothy F. Geithner's outline of a plan for removing toxic assets from bank balance sheets. Yesterday, Mr. Geithner announced the details and -- what do you know? -- the market shot up. Obviously, the market's mood swings are not the best indicator of Mr. Geithner's merits or of his plan's. But what's new as of yesterday is that we have a fuller basis for evaluating his program. And the best judgment is: It's worth a try, but hardly guaranteed to succeed.

Estimates vary, but there are probably between $1 trillion and $2 trillion worth of toxic assets on the balance sheets of America's financial institutions -- heavily concentrated in the largest banks. These are instruments (often backed by troubled real estate and often of mind-blowing complexity) for which the market has collapsed, because investors regard them as risky and incomprehensible. The resulting paper losses are eating away at the banks' capital, eroding their ability to lend. Until banks can unload toxic assets, they will find it hard to raise private capital -- and must devour more and more government capital.

Mr. Geithner explained yesterday that the Treasury's plan relies on $100 billion from the Troubled Assets Relief Program to leverage hundreds of billions of dollars in Federal Deposit Insurance Corp. loan guarantees and Federal Reserve financing. Private-sector hedge funds and the like will supply the remaining equity capital, for a potential asset-buying total of $1 trillion. The private partners will compete among themselves to buy assets, then manage them and profit in proportion to their investment. The government will see a proportional share of the upside -- but bear practically all of the losses. This is the sweetener that induces private firms to participate. If all goes according to plan, the market know-how of the private firms will lead to maximally efficient deployment of government resources, and taxpayer losses will be relatively modest. Indeed, Mr. Geithner expects the initial federally backed purchases to help establish market prices for previously illiquid assets, which will then bring in more and more private buyers with no need for federal support.

This cleverly avoids having to ask Congress for more Wall Street bailout money. One problem, though, is that the banks that now own the toxic assets think they're worth a lot more than would-be buyers do. It's unclear whether Mr. Geithner's incentives will bridge the gap. The trick is to make the government's private partners put up some of their own money so that they have an incentive not to overpay the banks -- while subsidizing them enough that they don't haggle endlessly and defeat the purpose of the program. We won't know whether Mr. Geithner has struck that balance until his private partners try their first purchases, probably a month or so from now.

Notably, there are no limits on the compensation that participating firms may pay their employees. This strikes us as appropriate, since the private partners are putting their own money at risk and, unlike AIG or the automakers, are not using government help to survive in the first place. Even the threat of inconsistent or vindictive changes to this policy could deter private participation in this important policy effort. We don't know whether Mr. Geithner's plan will work. But it won't have a chance unless everyone involved -- private investors, regulators, Congress and the Obama administration -- plays by a clear and consistent set of rules.







Geithner tackles ‘legacy assets’
By Krishna Guha in Washington
Copyright The Financial Times Limited 2009
Published: March 23 2009 18:59 | Last updated: March 23 2009 18:59
http://www.ft.com/cms/s/0/41edecbc-17da-11de-8c9d-0000779fd2ac.html


The plan announced on Monday by Tim Geithner, US Treasury secretary, sets out to deal with “legacy assets”, the toxic residue from the bubble years that are clogging up bank balance sheets, creating uncertainty about the solvency of financial institutions and deterring new lending.

It aims to do so by providing mechanisms to price these assets and to remove some of them from bank balance sheets. The hope is that this will reduce uncertainty as to the true financial position of the banks, enabling them to raise more capital from the private sector.

This would lessen the need for the government to recapitalise the banks with public capital.

The Geithner approach reflects the view that fixing the banking system will require policies that target both bank assets and bank capital. Monday’s announcement should be thought of as a complement to the plan to stress-test banks and provide capital insurance in the form of standby government equity.

Mr Geithner’s predecessor, Hank Paulson, twice tried and failed to deal with toxic assets. These efforts foundered largely because of problems over pricing and financing of asset transfers. Mr Geithner’s plan relies on private sector co-investors to price toxic assets, but more than 90 per cent of the total financing will come from the government sector.

Treasury is leaning heavily on the Federal Reserve and Federal Deposit Insurance Corporation to augment its limited funds because these agencies do not need Congressional approval to commit funds.

The private sector co-investors will have “skin in the game”, in market parlance. But the economic positions of the government and its partners are not symmetrical, since the government is providing its own leverage and the private investors are not.

While earlier legacy asset strategies focused exclusively on toxic securities, this plan is more expansive, targeting legacy loans as well, reflecting the broad deterioration in portfolios.

To tackle toxic securities, the government will create up to five joint ventures, providing a dollar of equity and a dollar of Treasury loans for each dollar of private capital raised. These funds will go out and bid for assets in the market.

The Fed will, meanwhile, offer financing for legacy assets – potentially including formerly triple A-rated subprime securities. It will demand risk capital from Treasury and via “haircuts” on loans.

To tackle problem loans, a marketplace will be created where banks can offer pools of loans for auction. Authorised investors will prequalify for dollar-for-dollar government equity and up to six times leverage guaranteed by the FDIC.

The scheme should help clarify the degree to which current depressed prices of traded securities reflects liquidity risk premium – absence of financing – as opposed to expected credit losses. The plan could reveal that the liquidity risk premium was large and the capital hole in the banks is not as great as feared. Or it could show that the liquidity risk premium was not that big and the capital hole is, indeed, great.

Crucial questions remain unanswered, above all on loan pricing. Mr Geithner said pricing would be more favourable than under today’s distressed conditions, but less favourable than under normal market conditions.

Moreover, would-be partners from the private sector might be deterred by the risk of being hauled before Congress if they make large profits. Mr Geithner said on Monday that private partners needed “clear rules of the road”. But he can provide only limited assurances with respect to future action by Congress.

Pricing problems remain. Many toxic securities are complex and embed fraud. Some are so idiosyncratic that discovering a price for one may not help much in valuing another notionally similar security. Banks may not be willing to part with loans that have not been heavily written down at prices that prevail in the FDIC-backed auctions.

In addition, the $500bn to $1,000bn scheme is still small relative to the size of asset markets. Unless credit conditions ease considerably, the price levels established under these schemes will be sustained only by continuing access to lower-cost government finance.

The current programme will be able to remove only a relatively small portion of legacy assets from banks. So banks will still be exposed to further deterioration in their portfolios.





The Repairman's Burden
By Eugene Robinson
Copyright by The Washington Post
Tuesday, March 24, 2009; Page A13
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR2009032301978.html


Treasury Secretary Timothy Geithner is a repairman, not a revolutionary. Contrary to the impression he sometimes gives, he does understand why the Sun King excesses of Wall Street's pampered executives make people so angry. Essentially, though, he blames the players, not the game.

"We still have a system that has been exceptionally good, better than any other, in getting capital to the guy who has an idea," Geithner said yesterday in an interview. Hours earlier, he had rolled out his long-awaited plan to get credit flowing through the economy again; after my last question, he dashed from his Treasury office to the White House next door for a meeting with President Obama and the rest of his economic team. They had good news to talk about, for a change: At least initially, the markets reacted favorably to Geithner's proposal to enlist private capital in cleansing the system of paralyzing "toxic" assets.

The grandees of Wall Street have every incentive to do anything they can to bolster Geithner's position, since he's the kindly sheriff who stands between them and the snarling mob at the gate.

But Wall Street seems to have gone out of its way to make Geithner's job more difficult. The "retention" bonuses at the insurance giant AIG -- to which the government has made available an astounding $170 billion in aid -- dominated the news cycle for a full week. On Thursday, we learned that Citigroup, recipient of $45 billion in bailout money, had decided to spend $10 million renovating its executive offices. Yesterday ABC News revealed that J.P. Morgan Chase planned to spend $138 million on two new corporate jets and improvements to its hangar at the Westchester, N.Y., airport; the company later said that it won't proceed with the project until it has paid back its $25 billion in bailout money.

Geithner noted that the use of government resources to rescue Wall Street from its own foolish bets and boneheaded decisions actually began in late 2007. "Even after that, you had people making stunningly awful judgments" about corporate compensation and perks, Geithner said. "It makes it much harder for us."

From Obama on down, the administration is displaying little enthusiasm for attempts in Congress to recover the $165 million in AIG bonuses through narrowly written tax legislation. Wall Street executives have been sputtering at the thought of "retroactive" taxation and grumbling that if this is the way things are going to be, they might decide to steer clear of any new government programs. Geithner needs Wall Street's participation for his financial rescue plan to work.

But it seems to me that Wall Street should be the lesser of his worries. Geithner's plan offers private investors the opportunity to reap relatively big gains by taking relatively small risks. Some of the risk is assumed by taxpayers. Christina Romer, head of the Council of Economic Advisers, said over the weekend that these private firms will be doing the government a favor by participating in the program. But that's wrong. Investors will participate because they think they can make money. The only entity that's doing anyone a favor -- make that doing everyone a favor -- is the government of the United States.

"We can't solve the financial crisis without the government taking risks," Geithner said. An alternative approach in which the government would take over all the "toxic" assets would saddle taxpayers with more risk rather than less, he argued. But it's unrealistic to expect citizens, having already poured more than $1 trillion into the Wall Street sinkhole, to react well when money managers haughtily make demands and set conditions.

Geithner has not been impressive as a performer. He talks so fast that it's hard for listeners to keep up. Grand settings, such as his ornate office, seem to swallow him up.

He does have a vision, though. He sees, eventually, a reformed financial system in which the "too big to fail" behemoths such as AIG or Citigroup are required to run their businesses in a more conservative fashion. He sees better regulation and more transparency, so that hedge funds are not so opaque and the derivatives markets are not left unsupervised to run amok.

The goal that Geithner describes sounds like an improved system but not one that is fundamentally different from the system we have now. If populism is resurgent in the land, it doesn't get past Geithner's desk. Wall Street should be toasting the guy -- but with beer, not champagne.

The writer will answer questions at 1 p.m. today at http://www.washingtonpost.com. His e-mail address is eugenerobinson@washpost.com.








Shares jump on US toxic asset plan
By Alan Rappeport, Francesco Guerrera and Julie MacIntosh in New York
Copyright The Financial Times Limited 2009
Published: March 23 2009 13:11 | Last updated: March 23 2009 16:24
http://www.ft.com/cms/s/0/7e0a2e32-17a7-11de-8c9d-0000779fd2ac.html


Shares jumped on Monday after the US Treasury unveiled its plan to relieve banks of up to $1,000bn in legacy assets plaguing their balance sheets, in the hope of restoring stability and confidence in the stricken financial sector.

The Treasury will put $75bn to $100bn of the original $700bn of funds from the troubled asset relief programme approved by Congress last October, into a public private investment programme.

The Tarp funds will be used as government equity and partnered with private funds to purchase troubled loans or securities. That public and private equity would be leveraged by credit from the Federal Deposit Insurance Corporation, in the case of loan purchases, and the Federal Reserve’s term asset-backed securities loan facility (Talf) programme, in the case of securities.

The programme, which Treasury called an effort to “repair balance sheets throughout our financial system” and to “drive us toward recovery”, is divided into two separate schemes. One targets “toxic” credit securities and the other focuses on portfolios of more traditional loans deteriorating due to the recession. Through the plan, the government will generate $500bn in purchasing power, with the potential to expand to $1,000bn.

For toxic securities, the government will authorise up to five investment managers to raise equity capital with the government matching the equity dollar for dollar. The Treasury would also lend the joint venture fund up to 50 per cent of its equity in the form of senior debt. These funds would then bid for assets, with the private partner deciding the price. The five new joint venture funds would be able to draw on Fed Talf financing.

In a separate scheme for portfolios of “problem” loans – mostly in traditional distressed real estate – the government will use a separate vehicle backed by FDIC. Banks will offer pools of loans for sale in an auction format. Authorised joint venture partners will bid for these pools. The government will provide the winning bidder with up to four times the equity the private investor puts in. The FDIC will guarantee loans of up to six times equity.

According to the Treasury, this plan is better than other methods for banks to unwind bad assets or direct government purchases of toxic assets, because it aligns the risks taken by the private sector and by taxpayers and because it allows for “private sector price discovery”, reducing the chance that the government will overpay for assets.

For the more traditional “legacy loans”, banks will identify pools of assets to sell which will be auctioned by the FDIC to the highest bidder. The purchases will be financed through debt guaranteed by the FDIC, which will receive a fee, at which time private fund managers will control and manage the liquidation of the assets under FDIC supervision.

“Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience,” the Treasury said in a fact sheet on Monday.

Some details remained elusive on Monday such as lending rates, minimum loan sizes, haircuts and loan durations. Treasury said that these will be “informed by discussions” with market participants.

“The fact that they’re actually moving forward with a concrete plan is a big step, because previously there wasn’t much detail at all,” said Brian Bethune, economist at IHS Global Insight.

US bank shares were lifted in early trading as details of the plan were released, with Citigroup surging by 16.03 per cent and Bank of America gaining 16.16 per cent. By midday, the benchmark S&P 500 index was 4.42 per cent up at 802.52, the Dow Jones Industrial Average rose 4.34 per cent to 7,594.36 and the Nasdaq Composite index gained 4.04 per cent to 1,516.14.

Global markets were also upbeat, with Asian stocks rising to a two-month high, while the dollar rose against the euro and strengthened against the yen. London’s benchmark FTSE 100 index rose 2.7 per cent to 3,946.16, while there were also solid gains in continental European equities.

The success of the programme will help determine whether an increasingly besieged US administration regains full credibility in its handling of the financial crisis. It is also a crucial test for Tim Geithner, the embattled Treasury secretary, who is fending off Republican calls for his resignation and faced sharp criticism for the lack of details in his earlier recovery plans.

Last week the Obama administration felt the wrath of populist anger over $165m in bonuses paid to employees of AIG, the bailed-out insurance group. Michael Feroli, US economist at JPMorgan Chase, noted that the success of Monday’s plan could hinge on private sector fears that that profits earned under the scheme could be later confiscated by Congress. The Treasury has also promised a significant portion of the Tarp funds, he said, and could have to ask for more if banks fail stress tests.

On Monday, President Barack Obama lauded the plan as one that would let tax payers share in the upside and the downside as banks shed bad assets from their books.

“We have one more critical element in our recovery but we still have a long way to go,” Mr Obama said. “We think that we are moving in the right direction.”

Banks and investors welcomed the plan, saying the government’s willingness to provide generous loans to buyers of toxic assets would entice private equity groups to offer attractive prices and increase financial institution’s appetite to sell the toxic assets burdening their balance sheets. But even as they praised the financial terms offered by the authorities, Wall Street and private equity executives expressed concerns that Congress might impose more stringent controls and oversight over participants in the plan.

People close to the situation said the plan was the result of detailed talks between Treasury, banks, private equity groups and other investors over the past few weeks. Senior private equity executives said the key terms of the initiative unveiled on Monday went beyond their own wish-lists.

Some investors had asked Treasury to provide debt equal to around three to four times the value of the equity to be injected in the public-private partnerships but the authorities decided to grant leverage of up to six times for the purchase of toxic loans, making it even more attractive for private equity groups to participate in the plan.

Wall Street banks, which have taken billions of dollars of writedowns on toxic assets, said the plan’s structure was favourable to them as it gave them the last word on whether to sell their toxic assets. ”As it stands, there is very limited downside for us,” a senior Wall Street banker said. ”If we like the price offered, we will sell the assets and record an accounting gain and if we don’t, we will stay as we are”.

Additional reporting by Kiran Stacey





Warning over bonus crackdown
By Aline van Duyn and Julie MacIntosh in New York
Copyright The Financial Times Limited 2009
Published: March 22 2009 18:24 | Last updated: March 22 2009 23:18
http://www.ft.com/cms/s/0/f20f709c-1709-11de-9a72-0000779fd2ac.html


Plans by US lawmakers to curtail big Wall Street bonuses may have adverse effects on government rescue plans aimed at restarting consumer lending and resolving the toxic asset overhang.

Plans to pay AIG traders $165m in bonuses after the company received $160bn of taxpayer funds sparked outrage
In particular, private investors such as hedge funds and private equity groups may be less likely to take part amid concerns of government scrutiny and fears that profits may be clawed back in the future.

Fed officials believe there is already evidence of this in the lacklustre initial take-up of loans offered for the term asset-backed securities loan facility (Talf).

The first $200bn leg of the Talf, aimed at restarting the securitised debt markets, began last week and details are expected on Monday on a “public/private partnership” aimed at getting billions of dollars of toxic assets off banks’ books.

“I just hope this divide between Washington and the investment community doesn’t actually injure the initiatives we need to succeed,” said Roger Altman, the head of Evercore Partners and a former deputy US Treasury secretary. “We need the investment community to participate in the Talf and the public/private partnership, and it would be a shame if they were not willing to step in.”

Already some investors have been concerned that borrowing money from the Federal Reserve to buy securities backed by car loans and credit cards might open them up to scrutiny from regulators. If nothing else, this could result in time-consuming disclosure requirements. “What we hear time and time again from the investors’ standpoint, and even the issuers’ standpoint, is a reluctance to get involved with a government programme, for fear of retribution . . . and that there’s some sort of clawback [on profits],” said Greg Peters, head of fixed income and economics research at Morgan Stanley.

“There’s such concern about over-reaching government involvement that it’s actually hurting these programmes, ultimately,” he said. The Fed said it had lent $4.7bn to investors to buy securities. By borrowing money to buy triple A rated securities backed by car loans, the returns available can reach 20 per cent.

Tim Geithner, Treasury secretary, has said that the Talf programme could be expanded to $1,000bn, making it a vital part of an effort to make credit available to consumers and businesses after the collapse of the securitisation markets, for years a key source of financing. Mr Geithner is also working on a plan for private investors to buy toxic assets that are clogging up banks’ balance sheets and that could include elements used in the Talf, such as lending investors money to pump up potential returns.

There has been public outrage over plans to pay AIG derivatives traders $165m in bonuses after the company received $160bn of taxpayer funds to stay afloat. To recoup the funds, the House of Representatives approved a bill last week that would impose a 90 per cent tax on bonuses to employees of bailed-out institutions.

Michael Widner, banking analyst at Stifel Nicolaus, said the bonus bills defeated the object of many of the government programmes to rebuild the banking sector – such as capital injections from the troubled asset relief programme (Tarp).

“In our view the government has just given all of those banks strong incentives to get out from under Tarp as soon as possible. That means the banks will likely do what they wanted to do before Tarp came along.” This would mean less lending, fewer modifications to mortgage loans, more cost cutting, more capital building and more job cuts, he said.

Additional reporting by Saskia Scholtes in New York and Krishna Guha in Washington







Senate Will Delay Action on Punitive Tax on Bonuses
By Shailagh Murray and Paul Kane
Copyright by The Washington Post
Tuesday, March 24, 2009; Page A07
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR2009032303201.html?hpid=topnews


Jarred by a cool reception from the White House and fears of unintended consequences across the financial world, Senate leaders are likely to delay until late next month legislation to punitively tax bonuses at banks and investment firms that receive federal aid.

Senate Majority Leader Harry M. Reid (D-Nev.) announced last week that the Senate would move ahead with the legislation as soon as possible, and he attempted to bring the bill to the floor Thursday night. But he revised that timetable yesterday, saying that the chamber will spend this week debating a national-service bill before turning to a long-scheduled showdown over the budget for fiscal 2010. With just two weeks to go until Congress departs for a spring recess, action on the tax measure would be unlikely before late April.

Reid's shift came as senators in both parties voiced increasing skepticism about the tax approach taken by the House, echoing President Obama's admonition Sunday night on CBS News's "60 Minutes" against using the tax code "to punish people."

Finance Committee Chairman Max Baucus (D-Mont.), who introduced a Senate version of the bill Thursday, said yesterday that it is "unclear at this point" when the measure will be considered. He initially hoped to pass his legislation in a matter of days but said White House officials and other senators were offering "a lot of ideas" for modifying his proposal. But he added that no consensus has emerged on the specifics of the bill, as opposed to the unified outrage over the bonuses.

"Everybody knows you've got to address the outrage -- that's a no-brainer," Baucus told reporters.

Slow-walking the legislation would allow more time for leaders of American International Group, the troubled insurance giant at the center of the controversy, to attempt to recoup the targeted bonuses voluntarily. New York Attorney General Andrew M. Cuomo said yesterday that 18 of the 25 AIG Financial Products employees who received the biggest retention payments had agreed to return them, amounting to more than $50 million. [Story, D1.]

The delay also would give lawmakers room to consider more measured restraints on executive pay.

The AIG bonuses stirred an unusually potent bipartisan furor on Capitol Hill from lawmakers still troubled by the scope of the $700 billion Troubled Assets Relief Program approved in October, and Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke are slated to testify on the matter today before the House Financial Services Committee. On Thursday, five days after the AIG payments were disclosed, the House voted 328 to 93 to impose a 90 percent tax on the $165 million in bonuses distributed this month to employees of the firm's derivatives division, where high-risk trades led AIG to the verge of collapse and helped trigger the global financial crisis.

But the House bill would also apply to thousands of workers at major institutions such as Citigroup and Bank of America that have received more than $5 billion in TARP funding. The Senate version of the legislation, released shortly after the House vote, is even more broad, applying to firms that received less aid.

As the scope of the bills sank in over the weekend, industry leaders warned that some firms might reject government funding in an effort to free themselves from federally imposed compensation restraints, potentially jeopardizing economic recovery plans.

Obama's response to the House vote was decidedly neutral. Yesterday, on the eve of the president's prime-time news conference focusing on his administration's attempts to stabilize the economy in partnership with the nation's top financial firms, White House press secretary Robert Gibbs expressed the administration's concerns about the bill's potentially damaging downsides.

"We cannot and should not reward failure with bonuses and the message that would send," he said. But he added that administration officials "also want to make sure you don't do harm to the financial system."

Obama expressed similar reservations in a portion of the "60 Minutes" interview that was not broadcast. "We're going to take a look at this legislation, and I'm going to do so with two principles in mind. Number one, we've got to make sure that people aren't rewarded for failure with taxpayer money," he said. "Number two, we've got to keep our eye on the big picture and the fact that we've got to get our banking system lending again."

Obama's statement contrasted with the outrage he expressed early last week when he vowed to "pursue every legal avenue to block these bonuses." White House officials said the president is waiting to see what emerges from Congress before deciding whether to sign the measure into law.

While the Senate pauses, House Financial Services Committee Chairman Barney Frank (D-Mass.) is pushing ahead with a different proposal that his panel could approve as soon as tomorrow. The measure would forbid all retention bonuses at any bank or firm receiving TARP funding until the recipient has paid back the Treasury in full. Existing contracts that call for executives to receive six- and seven-figure retention bonuses would not be broken, but the payments would be delayed until the bank or financial firm had fully refunded the government.

In an interview Sunday on CBS's "Face the Nation," Frank expressed reservations about the tax approach. "I voted for the bill. I was not a major advocate," he said. "People are worried about taxation being used in this way. People are worried about interfering with contracts."

In the House, nearly half of Republicans, including Rep. Eric Cantor (Va.), the No. 2 GOP leader, voted in favor of the tax. But in the Senate, after a week of saying little, Republicans came out in force yesterday against the legislation.

"My view is that this bill ought to slow down and we ought to think about the ramifications of what we're doing," Senate Minority Leader Mitch McConnell (Ky.) told reporters.

Sen. Judd Gregg (R-N.H.) said the bonus tax could sabotage the administration's plan, which Geithner announced yesterday, to court private-sector investors to buy up the toxic bank assets that have paralyzed the economy.

"I would think a lot of the private-sector folks who might invest with the government are going to have second thoughts about that, unfortunately," Gregg said, noting that firms not included in the current proposals fear that they will be targeted in later bills.

One key Democratic defection was Senate Budget Committee Chairman Kent Conrad (N.D.), who said the bonus tax raised serious constitutional questions because of its narrow focus. "Do you really want to use the tax code to go after just a handful of people?" he said in an interview with MSNBC.

But Sen. Olympia J. Snowe (R-Maine), a co-sponsor of the legislation, urged her colleagues to push forward with it. "It would be a huge mistake for Congress to retreat," she said.

Staff writer Michael A. Fletcher contributed to this report.













Administration Seeks Increase in Oversight of Executive Pay
By STEPHEN LABATON
Copyright by The New York Times
Published: March 21, 2009
http://www.nytimes.com/2009/03/22/us/politics/22regulate.html?hp


WASHINGTON — The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.

Officials said the proposal would seek a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire financial system.

It will propose that many kinds of derivatives and other exotic financial instruments that contributed to the crisis be traded on exchanges or through clearinghouses so they are more transparent and can be more tightly regulated. And to protect consumers, it will call for federal standards for mortgage lenders beyond what the Federal Reserve adopted last year, as well as more aggressive enforcement of the mortgage rules.

The administration has been considering increased oversight of executive pay for some time, but the issue was heightened in recent days as public fury over bonuses spilled into the regulatory effort.

The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could go beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation.

One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company.

The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission.

During the presidential campaign, Mr. Obama repeatedly urged regulators to adopt new rules to give shareholders a greater voice in setting executive pay for all public companies. And last month, as part of the stimulus package, Congress barred top executives at large banks getting rescue money from receiving bonuses that exceeded one-third of their annual pay.

The regulatory plan is being put together ahead of the meeting of the Group of 20 industrialized and developing nations in London. The meeting, which begins April 2, is expected to be dominated by the global financial crisis and discussions about better oversight of large financial companies, whose problems could threaten to undermine international markets.

An important part of the plan still under debate is how to regulate the shadow banking system that Wall Street firms use to package and trade mortgage-backed securities, the so-called toxic assets held by many banks and blamed for the credit crisis.

Officials said the plan would also call for increasing the levels of capital that financial institutions need to hold to absorb possible losses. In a sign of the economic system’s fragility, officials said the administration would emphasize that those heightened standards should not be imposed now because they could discourage more lending. Rather, they would be put in place after the economy began to rebound.

“The argument some are making is that they don’t want to be stepping on the gas pedal and the brake at the same time,” said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics and a former top official at the International Monetary Fund.

Administration officials are also debating how tightly to supervise hedge funds.

A broad consensus has emerged among regulators and administration officials that hedge funds must be registered and more closely monitored, probably by the Securities and Exchange Commission. But officials have not decided how much the funds will have to disclose about their investments and trading practices. The officials spoke on condition of anonymity because the regulatory plan was still being formulated and they did not want to upstage Mr. Obama or Treasury Secretary Timothy F. Geithner, who will describe the plan when he appears before Congress on Thursday.

A central aspect of the plan, which has already been announced by the administration, would give the government greater authority to take over and resolve problems at large troubled companies not now regulated by Washington, like insurance companies and hedge funds.

That proposal would, for instance, make it easier for the government to cancel bonus contracts like those given to executives at the American International Group, which have stoked a political furor. Under the proposal, the Treasury secretary would have the authority to seize and wind down a struggling institution after consulting with the president and upon the recommendation of two-thirds of the Federal Reserve board.

Long before he became Treasury secretary, Mr. Geithner sought broader authority for the government to resolve problems at financial institutions not under bank regulators’ supervision.

The government now has the power to take over only the banking unit that controls federally insured deposits of large troubled institutions, not the parent company — a limit that could pose problems if large financial conglomerates like Citigroup or Bank of America continued to spiral downward.

In unveiling the regulatory plan, Mr. Obama would signal to Europe that he intended to crack down on the risk-taking and other free-wheeling practices by the financial industry that resulted in the global economic meltdown.

France and Germany especially have suggested that the better response is not more government spending but tighter regulation.

The Obama administration has urged European nations to do more to restart their economies through financial stimulus. Mr. Obama is hoping that by showing a serious commitment to tighter regulation he can more easily persuade other countries to increase government spending and stimulate demand by consumers and businesses that would help pull the global economy out of a serious decline.

But the administration’s efforts, especially on tighter regulation of hedge funds, are not expected to assuage some European countries. Moreover, the hedge fund industry has significant influence on Capitol Hill and has shown that it can defeat proposals it finds onerous.

While a growing number of hedge fund advisers have voluntarily agreed to register with the S.E.C., many of the most prominent ones are expected to oppose efforts to require them to provide what they consider proprietary information about their holdings and trading practices, even on a confidential basis.

From the outset of the Obama administration, officials and European leaders have disagreed over how much to limit pay. And Mr. Geithner has discouraged the administration from imposing across-the-board limits on compensation of all employees at troubled companies receiving federal assistance and more burdensome pay restrictions at healthy institutions that the administration is trying to encourage to take government money so they can increase lending.

Last week, Ben S. Bernanke, the Fed chairman, also called on regulators to supervise executive pay at banks more closely to avoid “compensation practices that can create mismatches between the rewards and risks borne by institutions or their managers.” Much of the plan would require the approval of Congress, where divisions are forming over how best to overhaul financial industry oversight.

Representative Barney Frank, the Massachusetts Democrat who heads the Financial Services Committee, said he believed giving the government new authority to take over troubled companies could be adopted by the House relatively quickly, particularly after the furor over the A.I.G. bonuses.

“This would give the government the same powers that you would get as if the company were in bankruptcy,” Mr. Frank said in an interview shortly after meeting with Mr. Geithner on the plan.

But Mr. Frank and other lawmakers said other elements of the plan could take more time, like expanding the authority of the Federal Reserve to become a systemic regulator.

In a hearing Thursday, Senator Christopher J. Dodd, a Connecticut Democrat who is chairman of the banking committee, expressed skepticism about that proposal. “Whether or not those vast powers will reside at the Fed remains an open question,” said Mr. Dodd, pointing out that the Federal Reserve had failed to apply tough oversight of the companies it now regulates.

Landon Thomas Jr. contributed reporting from London.





Financial Policy Despair
By PAUL KRUGMAN
Copyright by The The New York Times
Published: March 22, 2009
http://www.nytimes.com/2009/03/23/opinion/23krugman.html?ref=opinion


Over the weekend The Times and other newspapers reported leaked details about the Obama administration’s bank rescue plan, which is to be officially released this week. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

This is more than disappointing. In fact, it fills me with a sense of despair.

After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Let’s talk for a moment about the economics of the situation.

Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.

As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now.

But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.

But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost.

Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.

All is not lost: the public wants Mr. Obama to succeed, which means that he can still rescue his bank rescue plan. But time is running out.






Treasury Presses Ahead With Plan For Toxic Assets - New Body to Work With Private Investors
By David Cho
Copyright By The Washington Post
Sunday, March 22, 2009; Page A01
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/21/AR2009032102246.html?hpid=topnews


The Treasury Department will unveil the next step in its financial rescue efforts tomorrow, announcing that it intends to create a government body, called the Public Investment Corp., to finance the purchase of as much as $1 trillion in soured loans and toxic assets from ailing banks, according to sources.

The plan calls for the new entity to combine its resources with the Federal Deposit Insurance Corp., the Federal Reserve and private investors to buy those loans and other assets. But the government will put far more money into the deals and take on more risk than the investors, which could include hedge funds, private-equity firms, pension funds and foreign investors with U.S. headquarters, the sources said. The corporation will be funded with $75 billion to $100 billion from the $700 billion financial rescue package.

Key details of the toxic asset purchasing program are not yet finalized, said officials in contact with the Treasury. Some expressed concern that the markets would expect too much out of Monday's announcement. When Treasury Secretary Timothy F. Geithner first sketched out the administration's rescue plan last month, he was criticized on Wall Street and on Capitol Hill for being too vague and creating uncertainty in the markets.

The Obama administration also risks a backlash from lawmakers and ordinary Americans who expressed outrage over $165 million in bonus payments by American International Group to employees of its most troubled unit -- despite the firm receiving more than $170 billion in federal aid.

White House officials said they are seeking a solution to the AIG bonus controversy in light of a bill that the House passed Thursday that would impose punitive taxes on bonus payments at all financial firms. Industry officials say the House measure would scare off many banks from taking government aid because the majority of their employees receive bonuses. The banks could still survive, but without federal assistance they would not have enough capital to restart lending, which is considered central to reviving the economy.

The administration's goal, one senior official said, is to pursue compensation reform that addresses public outrage while maintaining stability in the financial system.

The toxic asset initiative is only one piece of the administration's financial rescue package, which includes efforts to stabilize banks, aid the consumer credit markets and provide relief for struggling homeowners to head off foreclosures, a Treasury official said.

"Our singular focus is on increasing lending to support economic recovery. Everything we do to stabilize the financial system is done with that goal in mind," added Stephanie Cutter, a Treasury adviser to Geithner. She declined to discuss details of the plan. "Ridding bank balance sheets of problem assets is the next step in that process, but it alone won't solve the credit problem."

The government's effort to deal with toxic assets and loans harkens back to the original intent of the Troubled Assets Relief Program, or TARP, that Congress approved in October.

After the measure was signed into law, Bush administration officials moved away from directly purchasing the assets partly because they thought it would take too long to develop the right program and because they thought they needed to use the bulk of the rescue funds simply to keep banks alive. Those officials were widely criticized by lawmakers and investors for changing course so suddenly and creating uncertainty about the government's intentions.

Last fall, billionaire investor Warren E. Buffet, Goldman Sachs chief executive Lloyd Blankfein and William H. Gross, the managing director of PIMCO, the largest bond fund in the world, approached Treasury officials about an idea to create investment funds, using public and private money, to buy toxic assets from banks, according to former senior Treasury officials. Buffett is a director of The Washington Post Co.

The Obama administration further developed that proposal to address the two main problems banks are facing: troubled debt such as mortgages that institutions are holding until the loans are paid off, plus the complex securities and derivatives that were invented to finance those loans. Both types of assets -- the loans and the complex securities -- have fallen in value. Banks are stuck with them, hindering their ability to lend.

To deal with the troubled loans, the administration would combine resources from the FDIC and the Public Investment Corp. to create several investment funds that could ultimately buy $500 billion to $750 billion worth of loans.

Here's how the program could work: If a lender wants to dispose of about $10 million worth of residential mortgages, it would approach the FDIC, which would run an auction for interested private investors. If the winning bid ended up fetching an $8 million price tag, the FDIC would provide most of the financing and guarantee losses for as much as $6 million. The Treasury would contribute as much as 80 percent of the rest of the cost of the pool of loans. Private investors would contribute only the remaining amount, yet would be in charge of managing the portfolio of loans. Government officials said they would maintain strict oversight on who will run the funds and how the funds will be managed.

To deal with toxic securities, the government has developed two separate initiatives.

One would expand an existing Fed program, known as the Term Asset-Backed Securities Loan Facility, or TALF, that is aimed at reviving non-traditional lending markets. These markets, which some call the "shadow banking system," provide nearly half of all U.S. consumer loans. The program would be expanded to buy some residential and commercial mortgage-backed securities that have high credit ratings using money from the Public Investment Corp. Although details have not been worked out, the plan would require the Fed to offer loans to private investors for a much longer period than the central bank does under TALF, possibly as long as seven years, sources said.

The administration will also launch public-private investment funds to buy toxic assets that back mortgages and other troubled loans. In this case, the Treasury would provide financing that would match, dollar-for-dollar, money from private investors who participate. In addition, the department would provide a loan to increase the newly formed investment funds' purchasing power. The details of these financing terms, however, have not been worked out, the sources said.

Treasury officials said more information about these programs will be revealed in the coming weeks. The Treasury also intends to ask Congress to pass legislation that would provide the government with the authority to take over large nonbank financial firms on the brink of collapse. Government officials said that if they had such powers last fall, they could have seized AIG and wound down its troubled businesses at far less cost to taxpayers.

"We've made significant progress over the last six weeks in putting the core elements in place to increase liquidity and stabilize the system," Cutter said. "We've got more work to do, and it will take some time for the financial system to recover, but we've done more in weeks than it takes other countries years to do."

Staff writers Binyamin Appelbaum and Michael D. Shear contributed to this report.