Saturday, March 28, 2009

Geithner Essentially Follows Hank Paulson

If Geithner follows through on picking asset managers in coming weeks to run funds that will buy distressed debt, he would succeed where former Treasury Secretary Henry Paulson failed.

After Congress approved the $700 billion financial-rescue fund in October, the Treasury for weeks sought to hire private managers and set up a system of government purchases of the securities. Paulson abandoned that attempt in November. Geithner plans to hire five asset managers by May.

The bailout is mostly in the form of loans and investments that are supposed to be repaid. The Obama and Bush administrations have allocated about $668 billion of the money, according to calculations by Bloomberg.

A further gauge of Fed's initial success could come from a Federal Reserve program providing loans to investors in new securities backed by loans and assets. Officials want to expand the program, the Term Asset-Backed Securities Loan Facility, to include older, devalued securities. Policy makers hailed the TALF’s start last week for catalyzing about $9 billion of deals.

The administration’s plan also includes an initiative to purchase whole loans from banks, which will be overseen by the Federal Deposit Insurance Corp. As with the asset managers for the distressed securities, the Treasury will provide matching capital to investors. The FDIC will offer debt guarantees of up to six times the capital provided.

By employing private investors, the administration is betting it can avoid taking over banks loaded with toxic debt, the strategy advocated by Nobel laureate economist Paul Krugman and ex-Treasury Secretary James Baker. At the same time, Geithner is seeking to address the devalued assets, rather than leave them on balance sheets as authorities in Japan did in the 1990s at the cost of economic stagnation.

New York University Professor Nouriel Roubini projects $3.6 trillion of losses on U.S. loans and securities, including writedowns on $10.84 trillion of securities and losses on a total of $12.37 trillion of unsecuritized loans.

Former Fed Chairman Alan Greenspan said last week that banks will need more than $750 billion in fresh capital, either from the government or private investors. President Barack Obama’s budget for 2010 also included a “placeholder” for an extra $750 billion in rescue funds.

Some Republicans said yesterday they were willing to give Geithner’s approach a chance, while Democratic leaders supported the announcement.

There’s no guarantee that banks will sell to the public- private investment funds, FDIC Chairman Sheila Bair told reporters yesterday on a conference call. She also said that “if we show the program is a success, it may be expanded, Congress may want to provide further support for it.”

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