3rd UPDATE:Treasury Reveals Details Of Plan To Handle Toxic Assets
March 23 2009 - 11:38AM
Dow Jones News
The U.S. Treasury Department unveiled its plan to deal with the
toxic assets weighing on banks' balance sheets Monday,
acknowledging that the financial system continues to face "acute
pressure" and is working against economic recovery.
The coordinated effort of the Treasury, Federal Reserve and
Federal Deposit Insurance Corp. will attempt to address the issue
of "legacy" real-estate related assets that Treasury Secretary
Timothy Geithner said is reducing banks' willingness to take risks
and to lend money to consumers.
"This will help banks clean up their balance sheets and make it
easier for them to raise private capital," Geithner said.
The plan calls for the federal government to work with private
investors to try to restart the market for the troubled mortgage
loans and securities, which in turn officials hope improves the
financial condition of banks that have received billions in capital
injections from the government already. The federal government will
pair up to $100 billion with private capital to generate $500
billion in purchasing power to buy the assets, and Geithner told
reporters the plan could reach up to $1 trillion in size over
time.
"We have to complement this program with a range of approaches
to help get these securities markets back to a point where they're
working again," Geithner told reporters Monday morning.
The new program marks a return by Treasury to dealing with the
illiquid assets that have snagged credit markets. Former Treasury
Secretary Henry Paulson abandoned plans to deal with the toxic
assets last year, in part because of the difficulty of determining
a proper price for assets where no market currently exists.
Geithner said Treasury hopes the program will unfreeze the
market for the assets. He said alternative proposals - letting the
assets fester on bank balance sheets or having the government
directly purchase them - would put too much risk on the backs of
taxpayers. The government needs to balance the potential losses for
taxpayers with the need to get credit markets functioning once
again.
"I am very confident this scheme dominates all the alternatives
for trying to find that balance," Geithner said.
Highlighting the policy choices the U.S. is making, Geithner and
Treasury referenced previous banking crises in Japan and Sweden as
providing lessons in the current turmoil. Treasury documents
released Monday said that letting illiquid assets sit on bank
balance sheets "risks prolonging a financial crisis, as in the case
of the Japanese experience" throughout the 1990s. Geithner,
discussing the issue with reporters, warned against taking the
opposite strategy from the Japanese and being too aggressive with
government intervention.
"We're not Sweden, we have a very complicated financial system,"
Geithner said, referencing that country's move in the early 1990s
to effectively nationalize some banks.
The new program has two parts. It will address both the legacy
loans banks are holding on their balance sheets and the legacy
securities backed by mortgage-related debt clogging the balance
sheets of financial firms.
Under the legacy loan program, investment funds will be created
to purchase pools of assets. Treasury will provide 50% of the
equity capital for each fund while private managers retain control
of asset management subject to FDIC oversight. Treasury said it
will approve up to five asset managers "with a demonstrated track
record of purchasing legacy assets," but it might consider adding
more managers depending on the quality of applications received. To
be pre-qualifed as a fund manager, the manager must submit an
application to Treasury by April 10.
Notably, the asset managers will not be subject to executive
compensation requirements that have come into focus in recent weeks
after American International Group Inc. (AIG) sparked a public
outcry by paying out $165 million in retention bonuses to top
executives.
Banks will identify the assets they wish to sell. The FDIC will
conduct an analysis to determine the amount of funding it is
willing to guarantee. Leverage will not exceed a 6-to-1
debt-to-equity ratio, the Treasury Department said. Meanwhile, the
highest bidder will have access to the Public-Private Investment
Program to fund 50% of the equity requirement of their
purchase.
Eligible assets will be determined by banks, regulators, the
FDIC and the Treasury Department.
"A broad array of investors are expected to participate in the
Legacy Loans Program," Treasury said in a fact sheet it provided
Monday. "The participation of individual investors, pension plans,
insurance companies and other long-term investors is particularly
encouraged."
Under the legacy securities program, non-recourse loans will be
made available to investors to fund purchases of legacy
securitization assets. Eligible assets are expected to include
certain non-agency residential mortgage-backed securities that were
originally rated AAA and outstanding commercial mortgage-backed
securities and asset-backed securities that are rated AAA.
-By Maya Jackson Randall and Michael Crittenden, Dow Jones
Newswires; 202-862-9255, maya.jackson-randall@dowjones.com