Interest Rate Roundup

Tuesday, February 10, 2009

More on the bank bailout plan

So today is the big day. The Obama administration is putting a full-court press on for the bank bailout plan, and most of the details of the efforts are now hitting the tape in various forms.

One key component will be expansion of the TALF program, which is designed to light a fire under the asset backed securities market. As the Wall Street Journal notes this morning:

"The Treasury Department is leading the U.S. effort to design a revamped financial-rescue plan for damaged markets, but behind the scenes the Federal Reserve will play a key role in making it work.

"Fed loans stand at the center of an ambitious program meant to jump-start markets for consumer loans. Officials plan to expand the program in scope and substantially in size.

"The program, known as the Term Asset-backed Securities Loan Facility, or TALF, was announced in November but still hasn't gotten up and running. It originally was meant to provide $200 billion of financing to investors buying securities backed by consumer loans such as car loans, student loans and credit-card debt. Officials hope investor demand for the securities will translate into more credit for consumers.

"Now officials are looking to apply it to other markets, such as those for securities backed by commercial real-estate loans and "private label" mortgages that aren't tied to the big U.S.-backed mortgage finance firms Fannie Mae and Freddie Mac.

"The central bank has other roles in the bailout. But the planned expansion of the TALF program is likely the most consequential of its roles. The Treasury originally committed $20 billion as a cushion for the Fed against losses from the program. The Treasury could expand that cushion to $100 billion, giving the Fed room to lend much more."

The Journal also discussed how stress testing of banks will be an important component of any bailout plan ...

"Many U.S. banks will be subjected to rigorous examinations to see if they are healthy enough to lend before receiving additional financial aid, according to people familiar with the matter.

"The stress tests will be part of the bailout revamp to be announced Tuesday by Treasury Secretary Timothy Geithner. In addition to fresh capital injections into banks, the new approach will include programs to help struggling homeowners; a significant expansion of a Federal Reserve program designed to jump-start consumer lending; and a private-public partnership to relieve banks of bad assets.

"Mr. Geithner is expected to present 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 will also announce new conditions on banks receiving aid, including documenting how the money is helping to generate new loans.

"The expanded effort could see as much as $2 trillion in financing flowing through the system, according to Congressional officials briefed Monday night. The expanded Fed facility and the "bad bank" could each reach $1 trillion in size, both of which would be seeded with bailout funds.

"The administration is discussing spending between $100 billion and $200 billion investing new funds in banks, up to $100 billion to expand the Federal Reserve facility and $50 billion to help homeowners. The Treasury wants to keep some money available in case of emergencies. These commitments could eat up much of the second half of the $700 billion bailout fund.

As for the cost and size of the program, those nettlesome details are still unknown. As President Obama said in last night's news conference: "We don't know yet whether we're going to need additional money or how much additional money we'll need until we've seen how successful we are at restoring a sense of confidence in a marketplace that the federal government and the Federal Reserve Bank and the FDIC, working in concert, know what they're doing."

The Washington Post discusses a total public and private price tag of perhaps $1.5 trillion. But reading between the lines, I don't think even the government has any idea what this will cost. More below ...

"Geithner plans to announce a public-private partnership that would seek to finance the purchasing of toxic bank assets that are at the heart of the credit crisis, officials and congressional sources said. These sources briefed by Treasury officials said the program may initially raise $250 billion to $500 billion in public and private funds to offer low-cost financing to encourage investors to buy the toxic assets. An administration official said the proposal is still subject to a public review and may not take final shape for several weeks.

"A second initiative will broaden the scope of a Federal Reserve program aimed at unclogging the markets for auto, student and other consumer loans. That initiative may expand to as much as $1 trillion, using $100 billion from the Treasury's rescue funds, and include aid for commercial real estate markets.

"A third program would offer direct help to the nation's largest banks. The government plans to conduct a review of major financial firms to determine how much they may need. Any federal aid would come with conditions that would give the firms incentives to pay the money back as soon as possible. The review would determine the ultimate price tag of this program.

"The primary goal of the bank-by-bank examination is to help regulators figure out whether these firms could withstand a downturn even worse than the current one, administration officials said."

Incidentally, the TARP name will also be buried. That part of the rescue program is now being dubbed ... drum roll please ... the Financial Stability Plan (FSP)! Does the name change mean anything? Of course not! But stirring the alphabet soup a bit is supposed to eliminate the memories of the dismal TARP planning and implementation process.


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