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" To that end, the Treasury Department would limit executive compensation for institutions receiving "exceptional assistance" (Geithner and Summers, 2009).
Troubles continued in the financial sector -- both Citigroup and the Bank of America needed second rounds of capital infusions, and federal guarantees against losses totaling tens of billions more -- while Ben S. Bernanke, the Federal Reserve chairman, warned that more capital injections might be needed to further stabilize the financial system. On Jan. 16, the Senate voted 52-42 to release the second round of funds (Gerth, 2009).
THE GEITHNER PLANS -on Feb. 10, Mr. Geither presented the rough outlines of the Obama administration's plan. A central piece of the proposal would create one or more so-called bad banks that would rely on taxpayer and private money to purchase and hold banks' bad assets. Another centerpiece of the plan would stretch the last $350 billion that the Treasury has for the bailout by relying on the Federal Reserve's ability to create money, in effect, out of thin air. The Fed's money will enable the government to become involved in the management of markets and banks in ways not seen since the Great Depression. In the credit markets, for instance, the administration and the Fed are proposing to expand a lending program that would spend as much as $1 trillion to make up for the $1.2 trillion decline between 2006 and last year in the issuance of securities backed primarily by consumer loans. The plan's third major component would give banks new helpings of capital with which to lend. Banks that receive new government assistance will have to cut the salaries and perks of their executives and sharply limit dividends and corporate acquisitions. They will also have to make public more information about their lending practices. A Treasury fact sheet said that banks would have to state monthly how many new loans they make, but stopped short of ordering banks to issue new loans or requiring them to account in detail for the federal money.
In addition, Obama officials were preparing a $50 billion initiative to enable millions of homeowners facing imminent foreclosure to renegotiate the terms of their mortgages (England, 2009).
The initial assessment of Mr. Geithner's plan from the markets, lawmakers and economists was brutally negative, in large part because they expected more details. Basic questions about how the various parts of the program would work, especially those involving the unsellable mortgages that banks are holding and preventing home foreclosures, were left for another day. Some Wall Street experts criticized the plan for relying too heavily on the same vague solutions proposed by the Bush administration.
In the first concrete step taken under the plan, the Obama administration on Feb. 25 ordered the nation's 19 biggest banks to undergo stress tests to check whether they could hold up if the economy deteriorated further. According to the new Treasury Department guidelines, the banks would have to assume that the economy contracts by 3.3% this year and remains almost flat in 2010. They would also have to assume that housing prices fall another 22% this year and that unemployment would shoot to 8.9% this year and hit 10.3% in 2010 ("Will the Geithner Plan Work," 2009).
Analysts complained that the administration's worst projections, which it describes as unlikely, are not much more dire than what many private forecasters already expect. If federal banking regulators conclude that a bank would not have enough capital under those circumstances, the bank would have to raise the extra money within six months or get it from the government in exchange for ceding a potentially big ownership stake. The Treasury said that it would provide new capital in exchange for shares of preferred stock that could be converted to shares of common stock at a price slightly below the level at which the shares traded on Feb. 9. For many of the big banks, that price would be slightly higher than the quoted prices today, but still at rock-bottom levels compared with just one year ago (Krugman, 2009).
In effect, analysts said, the administration's offer of additional capital could set a floor on share prices of the major banks, which will now be able to raise more money at lower cost if the market value of their shares dropped below the levels on Feb. 9.
In April, with banks like Wells Fargo and Goldman Sachs reporting strong first-quarter performances, officials in the Obama administration said that the Treasury Department had concluded that they needed to reveal the performance of the nation's 19 largest banks in the so-called stress test to help bolster confidence in the bailout plan. None of the banks failed the test, but their performance was said to vary widely, and the officials said they were concerned that revealing the information could lead investors to flee the weaker institutions, which could then require a larger infusion of federal funds (Carney, 2009).
PUBLIC-PRIVATE PARTNERSHIP - on March 23, Mr. Geithner laid out a detailed version of his rescue plan, which had as its centerpiece an attempt to draw private investors into partnership with a new federal entity that could eventually buy up to $1 trillion in troubled assets that are weighing down banks and clogging up the credit markets. Initially, a new Public-Private Investment Program would provide financing for $500 billion in purchasing power to buy those troubled or toxic assets - which the government refers to more diplomatically as legacy assets - with the potential of expanding later to as much as $1 trillion. At the core of the financing package was $75 billion to $100 billion in capital from the existing financial bailout known as TARP, along with the share provided by private investors, which the government hopes will come to 5% or more. By leveraging this program through the Federal Deposit Insurance Corporation and the Federal Reserve, huge amounts of bad loans can be acquired (Geithner, 2009).
The private investors would be subsidized but could stand to lose their investments, while the taxpayers could share in prospective profits as the assets are eventually sold, the Treasury said. The administration said that it expected participation from pension funds to insurance companies and other long-term investors.
The Treasury Department offered this illustrative example of how the program would work: A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors would submit bids. In the example, the top bidder, an investor offering $84, would win and purchase the pool. The F.D.I.C. would guarantee loans for $72 of that purchase price. The Treasury would then invest in half the $12 equity, with funds coming from the $700 billion bailout program; the private investor would contribute the remaining $6 (Ibid).
For a relatively small equity exposure, the private investor thus would stand to make a considerable return if prices recover. The government would make a gain as well. In the worst case, the bulk of the risk would fall on the government. The presumption, of course, was that the auction would lead to realistic purchase prices. But on June 3, the F.D.I.C. indefinitely postponed a central part of the program, acknowledging that it could not persuade enough banks to sell their bad assets under the plan. Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay (Sachs, 2009).
F.D.I.C. officials portrayed the change as a sign that banks were returning to health on their own. But some analysts said the banks' reluctance to clean up their balance sheets meant they were merely postponing their day of reckoning. Indeed, some analysts said government policies had made it easier for banks to gloss over their bad loans -- one policy changed accounting rules and made it easier for bank holding companies to refrain from writing down the value of assets for which there is no market. That change allowed many big banks to report higher profits, and thus higher capital, for the first quarter of this year. The F.D.I.C. program was one part of the Treasury Department's broader Public Private Investment Program to get bad assets off the books of major banks. The other big component, which Treasury officials say is still being prepared, is aimed at having the government team up with private investors to buy mortgage-backed securities (Clarke, 2009).
EXPANDED GOVERNMENT POWER to SEIZE FIRMS- on March 24, 2009, the Obama administration and the Federal Reserve began a full-court press to expand the federal government's power to seize control of troubled financial…[continue]
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