Obama’s menu for U.S. financial stability

Mortgage

latest financial news from Reuters....and so it goes on.....and on.....and on...
where will this take us....i wonder.....mmm

 Feb 9 (Reuters) - U.S. Treasury Secretary Timothy Geithner
on Tuesday will lay out the Obama administration's ideas for
tackling the financial crisis and its plans for disbursing what
remains in a $700 billion financial bailout fund.

 Following are some of the ideas under discussion:

 ASSET GUARANTEES

 The government is likely to offer banks a sort of insurance
policy by guaranteeing against losses on distressed assets that
would remain on a bank's books.

 Under this plan, assets would be "ring-fenced" from other
loans on the bank's balance sheet, which could bolster investor
confidence and help the bank raise private capital.

 With asset guarantees, the government could leverage
taxpayer funds by getting the Federal Reserve or Federal
Deposit Insurance Corp to cover a larger amount of assets than
the Treasury could buy on its own.

 Because of the potential expense of setting up a separate
government-run entity, or "bad bank," to hold bad assets --
another widely discussed possibility -- asset guarantees have
gained in favor as an option.

 The Treasury, the Fed and the FDIC have tailored two major
guarantee programs for Citigroup and Bank of America in this
manner.

 BAD BANK

 While the cost of a setting up a government-run "bad bank"
has appeared daunting, Geithner is likely to offer incentives
to lure private investors to buy distressed assets.

 "It can't all be private capital," Lawrence Summers, the
head of the White House National Economic Council, told Fox
News television on 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."

 A source familiar with the administration's thinking said a
"bad bank" financed in part by private equity was indeed under
discussion. To lure private investors, the bank could be
allowed to issue debt backed by the Federal Deposit Insurance
Corp, the source said.

 The "bad bank" would provide a repository that would take
assets off bank balances sheets, hopefully making it easier for
them to attract private capital and increase lending. The
assets could be held for several years until economic
conditions improve.

 FUNDING FED PROGRAMS

 The Treasury is expected to use some of the remaining
bailout funds to help the Fed expand a program that has been
set up to support consumer and small business lending.

 Currently under the program -- the Term Asset-Backed
Securities Loan Facility -- the Fed will lend up to $200
billion to holders of AAA-rated asset-backed securities
collateralized by auto, student, credit card and small business
loans, to try to free up credit. The Treasury pledged $20
billion to cover potential losses the Fed might face.

 The Treasury and Fed have said that program could be
expanded to cover an array of mortgage-backed securities or
other assets, and an expanded program could play a role similar
to a "bad bank." An expansion would require the Treasury to
pledge more money.

 MORTGAGE FORECLOSURE RELIEF

 Last month, the White House promised to dedicate between
$50 billion and $100 billion of remaining bailout funds to
prevent foreclosures.

 Officials are considering a plan to have
government-controlled mortgage enterprises Fannie Mae and
Freddie Mac underwrite failing loans, industry sources said.
The government would then give other mortgage companies a
subsidy to follow the lead of Fannie Mae and Freddie Mac, the
sources said.

 The evolving plan would be similar to a proposal that
Democrats in Congress had favored to fund a mortgage guarantee
program hatched by the FDIC under which the government would
insure loans against default.

 CAPITAL INJECTIONS

 Whatever approach it takes on dealing with toxic assets,
the Treasury is likely to continue tapping bailout funds to
make investments in banks to shore up their capital.

 Bank regulators are still sifting through thousands of
applications for government capital under a program set up with
the first half of the bailout funds. In addition, non-bank and
industrial firms are also trying to line up for cash.

 The investment program has been limited to preferred shares
and warrants for future common shares at deep discounts. A
source familiar with discussions said the Treasury was
considering a plan under which its preferred shares would
convert to common equity at some future point; avoiding the
dilution of current shareholders and offering banks time to
heal.

 The government reportedly may begin demanding preferred
shares that would convert to common stock after a certain
period, perhaps seven years. This would avoid an immediate
dilution of shareholders, but the government could end up with
large, and perhaps controlling, stakes in some banks if the
banks do not recover.

 MARK-TO-MARKET ACCOUNTING

 Speculation that the plan would include some form of
suspension or modification of "mark-to-market" accounting
rules, which require banks to recognize losses if their assets
fall in value, gave a lift to bank stocks on Thursday.

 Senate Banking Committee Chairman Christopher Dodd said on
Wednesday it might be possible to modify the rules without
"walking away" from the underlying standard. A source told
Reuters the Treasury and Securities and Exchange Commission
were not discussing suspending the rule.

 The rules are at the heart of the conundrum facing banks,
because many of the problem assets are illiquid, so a benchmark
price is nearly impossible to establish.

http://uk.reuters.com/article/marketsNewsUS/idUKN0644662120090209

Tags: bad bank, distressed asset guarantees, FED, Government, Insurance, Mortgages, Obama, private capital