- The Washington Times - Tuesday, February 10, 2009

The Obama administration’s first stab at cleaning up the banking mess will take a tailored approach. The closing of small failing banks will be accelerated, while banks that are too big to fail will be helped by a public-private partnership to dispose of their souring loan assets.

The complex program, to be announced by Treasury Secretary Timothy F. Geithner on Tuesday, acknowledges the political reality that Congress is unwilling to provide huge new sums to support banks, according to congressional, administration and Wall Street officials.

It is designed to try to save money through extensive use of federal guarantees and future loss-sharing with banks. But Wall Street analysts say it may only postpone the inevitable $1 trillion or more cost of dealing with soaring bank loan problems.

While the administration likely will give it a new name, the plan would build on the Bush administration’s unpopular bailout program of cash infusions for healthy small banks and troubled money-center banks. This would be coupled with loss sharing on portfolios of loans that have been steadily going into default and threatening to drag down the banks.

In addition to the already-tried remedies, the administration plans to set up an innovative mechanism to try to entice private hedge funds and equity funds to purchase the souring loan portfolios of banks by providing a government-guaranteed floor on the value of the loans. Details of the program remain to be hashed out with Wall Street players in the weeks ahead.

Lawrence H. Summers, director of the White House National Economic Council, gave a preview of the program in a round of television interviews Sunday and Monday.

“It can’t all be private capital … not given the size of the financial mess we have inherited,” he told “Fox News Sunday.” “But with the right kinds of government guarantees, with the right kinds of financing … with the right strategic approaches, Secretary Geithner believes that we can bring in substantial private capital.”

Mr. Summers did not say how much the program would cost above and beyond the $350 billion Congress has already provided the administration to continue the bank bailouts.

“Credit markets in this country are not working right” and “well do what is necessary” to start a process of repair, he said on ABC’s “This Week.” Asked whether the administration may seek more money down the road, he said, “Well see what happens.”

The program to address failing banks will be coupled with more popular programs to try to prevent potentially millions more home foreclosures and jump-start key credit markets, which support bank lending for credit cards, autos, college and small businesses.

The credit market programs, which are carried out by the Federal Reserve and Treasury, likely will be expanded to try to stave off a developing crisis in commercial real estate lending.

The administration has committed $50 billion to $100 billion of the remaining bank bailout funds to help modify defaulted mortgages to stave off foreclosures. It will ask Fannie Mae and Freddie Mac to take a leading role by establishing standards for loan modifications that banks could follow.

To address criticisms raised in Congress, the administration is likely to require banks that have received capital infusions and more extensive assistance to participate in the foreclosure prevention program, as well as strictly limit executive compensation, dividends and expenses. All banks participating in the program will be required to report how they used their funds.

The Federal Deposit Insurance Corp. (FDIC) will be given expanded funding to aggressively close small failing banks, and the administration may request expanded authority for the agency to close down nonbank financial institutions such as Wall Street firms and insurance companies. A current FDIC program for guaranteeing bank debts would be expanded from three years to 10 years.

“The FDIC has been preparing for increased bank failures and we expect that the number of bank failures will now increase as Treasury signals that it will not provide assistance to all institutions,” said Brian Gardner, Washington analyst at Keefe, Bruyette & Woods.

But the administration had to abandon its hope to create a large “bad bank” to absorb a significant share of an estimated $4 trillion of toxic assets on bank books because of the huge potential cost and the difficulty of assigning a value to the assets, a problem that also “dogged the Bush administration,” he said.

Some Wall Street analysts were skeptical that the limited approach the administration is taking will suffice to clean up the banking sector. Morgan Stanley, the Treasury’s adviser on the bailout program, predicted it will prolong the distress and recovery of the banking system and the economy.

But others said the plan to try to draw in Wall Street buyers for toxic assets shows promise.

“I think it is a great and necessary component,” said Joshua Rosner, managing director at Graham Fisher & Co. “Private capital will not return until there is a clear floor on bank balance sheet problems - not on the losses but on the valuation of assets that banks hold. Once we have this floor, it becomes a natural environment for private capital to revive the capital markets.”

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