February 10, 2009
Geithner Said to Have Prevailed on the Bailout
By STEPHEN LABATON and EDMUND L. ANDREWS
WASHINGTON— The Obama administration’s new plan to bail out the nation’s
banks was fashioned after a spirited internal debate that pitted the
Treasury secretary, Timothy F. Geithner, against some of the president’s
top political hands.
In the end, Mr. Geithner largely prevailed in opposing tougher
conditions on financial institutions that were sought by presidential
aides, including David Axelrod, a senior adviser to the president,
according to administration and Congressional officials.
Mr. Geithner, who will announce the broad outlines of the plan on
Tuesday, successfully fought against more severe limits on executive pay
for companies receiving government aid.
He resisted those who wanted to dictate how banks would spend their
rescue money. And he prevailed over top administration aides who wanted
to replace bank executives and wipe out shareholders at institutions
receiving aid.
Because of the internal debate, some of the most contentious issues
remain unresolved.
On Monday evening, new details emerged after lawmakers were briefed on
the plan.
It intends to call for the creation of a joint Treasury and Federal
Reserve program, at an initial cost of $250 billion to $500 billion, to
encourage investors to acquire soured mortgage-related assets from banks.
The Fed will use its balance sheet to provide the financing, and the
Federal Deposit Insurance Corporation might provide guarantees to
investors who participate in the program, which some people might call a
“bad bank.”
A second component of the plan would broadly expand, to $500 billion to
$1 trillion, an existing $200 billion program run by the Federal Reserve
to try to unfreeze the market for commercial, student, auto and credit
card loans. A third component would involve a review of the capital
levels of all banks, including projections of future losses, to
determine how much additional capital each bank should receive.
The capital injections would come out of the remaining $350 billion in
the Troubled Asset Relief Program, or TARP.
A separate $50 billion initiative to enable millions of homeowners
facing imminent foreclosure to renegotiate the terms of their mortgages
is to be announced next week.
Some of President Obama’s advisers had advocated tighter restrictions on
aid recipients, arguing that rising joblessness, populist outrage over
Wall Street bonuses and expensive perks, and the poor management of last
year’s bailouts could feed a potent political reaction if the
administration did not demand enough sacrifices from the companies that
receive federal money.
They also worry that any reaction could make it difficult to win
Congressional approval for more bank rescue money, which the
administration could need in coming months.
For his part, Mr. Geithner will blame corporate executives for much of
the economic crisis, according to officials. He will announce rules that
require all banks receiving capital from the government to submit plans
that describe how they intend to strengthen their lending programs and
generally restrict them from using the money to acquire other banks
until the government money is repaid.
But officials said Mr. Geithner worried that the plan would not work —
and could become more expensive for taxpayers — if there were too much
government involvement in the affairs of the companies.
Mr. Geithner also expressed concern that too many government controls
would discourage private investors from participating.
A spokeswoman for Mr. Geithner, Stephanie Cutter, had no comment.
In an interview on Monday Mr. Axelrod did not deny that there were
differences of opinion as the policy was being crafted or that he had
taken a harder line on issues such as executive pay restrictions, as
other participants to the discussions recalled. But he said he was
ultimately satisfied with the final product put forward by Mr.
Geithner.“We had a great and productive discussion and as a result we
came up with a good set of guidelines and rules,” he said. “I didn’t
come away disappointed in any way.”
The White House is hoping that its rescue plan will be perceived as a
more coherent rescue effort than the Bush administration’s, and one
whose breadth and scope are so vast that it begins to restore financial
confidence in the battered markets and entices private investors to come
off the sidelines.
The plan is calibrated to work on multiple fronts, with promises to
invest billions of dollars in scores of ailing banks and creation of a
new institution to relieve bank balance sheets of their most troubled
assets.
It will also renew a legislative proposal giving bankruptcy judges
greater authority to modify mortgages on more favorable terms to
borrowers and over the objections of banks.
Officials say that new rules encouraging transparency and limiting
lobbying are intended to begin to restore political confidence in a
program that has faced withering criticism in Congress, an effort that
they view as essential because they expect to return to Congress for
more money later this year.
But as intended largely by Mr. Geithner, the plan stops short of
intruding too significantly into bankers’ affairs even as they come onto
the public dole.
The $500,000 pay cap for executives at companies receiving assistance,
for instance, applies only to very senior executives. Some officials
argued for caps that applied to every employee at institutions that
received taxpayer money.
Abandoning any pretense about limiting the moral hazards at companies
that made foolhardy investments, the plan also will not require
shareholders of companies receiving significant assistance to lose most
or all of their investment. Some officials had suggested that the next
bailout phase not protect existing shareholders. (Shareholders at most
banks that fail will continue to lose their investment.)
Nor will the government announce any plans to replace the management of
virtually any of the troubled institutions, despite arguments by some to
oust current management at the most troubled banks.
Finally, while the administration will urge banks to increase their
lending, and possibly provide some incentives, it will not dictate to
the banks how they should spend the billions of dollars in new
government money.
And for all of its boldness, the plan largely repeats the Bush
administration’s approach of deferring to many of the same companies and
executives who had peddled risky loans and investments at the heart of
the crisis and failed to foresee many of the problems plaguing the markets.
In internal discussions, Mr. Geithner is said by officials to have
raised the lessons of countries that forced banks to make loans and
adopted other, more interventionist measures. Those strategies, he said,
wound up costing more and undermining their governments’ credibility. He
concluded the wiser course would be to provide economic incentives to
encourage lending.
Some Democrats in Congress who have been given previews of the outline
of the plan said it struck the right balance.
“They want to make sure the plan is a balance of carrots and sticks,
which are needed substantively and politically,” said Senator Charles E.
Schumer, Democrat of New York, vice chairman of the Joint Economic
Committee. “They are using every tool in the book because the problem is
so vast, but they are also tailoring their response to the individual
needs of each institution.”
For private institutional investors, the question of whether to invest
alongside the government will depend on what kinds of carrots and sticks
Treasury officials offer.
Managers of hedge funds and private equity funds are closely watching to
see how much the government pushes banks to write down the value of
troubled mortgages and mortgage-backed securities they want to sell.
There is no market value for most of those troubled assets because they
are not trading. Investors want to buy them at the lowest price
possible, but banks want to avoid selling them at rock-bottom prices and
realizing huge losses.
The impasse is particularly serious for whole mortgages, which are loans
that banks have kept on their own books instead of selling them to Wall
Street firms, which bundle them into pools and resell them as
mortgage-backed securities.
Under current accounting rules, financial institutions have already been
required to write down the value of mortgage-backed securities to
reflect their current market value. But banks do not have to write down
the value of whole mortgages if the borrowers are still current, and
many regional banks collectively hold vast numbers of those loans.
Under the category of sticks, private investment managers are closely
watching how the Treasury rolls out its “uniform stress test” for
grading the health of banks. If the government takes a tougher line with
more banks, it could force them to sell off more of their loans and take
their lumps sooner rather than later.
Under the category of carrots are various forms of financing and
government guarantees.
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