US may seek private funds for banking bailout

Agence France-Presse

Posted at Feb 10 2009 12:56 AM | Updated as of Feb 10 2009 08:56 AM

WASHINGTON – US President Barack Obama's administration will ask the private sector to help bail out the financial system, reports said Monday as speculation mounted on the eve of the plan's announcement.

Treasury Secretary Timothy Geithner was set to unveil a plan Tuesday aimed at restoring confidence in the financial system and credit flows, the lifeblood of the economy.

Leaks have multiplied about the highly anticipated Financial Stability and Recovery Plan amid cliff-hanger interest after the administration delayed the announcement, initially scheduled Monday, to focus on a more than 800 billion dollar economic stimulus in Congress.

Geithner's plan will include a government partnership with the private sector to buy banks' troubled assets, US newspapers reported Monday.

The plan for a so-called aggregator bank is among four main components of Geithner's bailout revamp, The Wall Street Journal reported, citing people familiar with the matter.

The aggregator bank, commonly known as a "bad bank" because of the toxic assets it would acquire, would be designed to allow banks to dispose of soured assets without worsening their weakened condition.

The toxic assets are at the core of the financial crisis. They include failing mortgages and other bad investment bets that are weighing on banks and are difficult to value, keeping credit flows seized up.

According to the Journal, the "bad bank" would be seeded with funds from the 700-billion-dollar Troubled Asset Relief Program (TARP), "but the idea is that most financing would come from the private sector."

The first half of the TARP, created in October to shore up faltering banks and unfreeze credit as the global financial crisis accelerated, was spent by George W. Bush's administration.

Geithner, a former New York Federal Reserve chief, is to unveil how the Obama administration intends to spend the second half and other measures designed to restore confidence in the financial system.

The New York Times, citing unnamed administration officials, said the revised bailout plan for the banking system "was likely to depend in part on the willingness of private investors other than banks -- like hedge funds, private equity funds and perhaps even insurance companies -- to buy the contaminating assets that wiped out the capital of many banks."

The details of how the government would entice private investment remained murky. The administration officials said they "are counting on the profit motive to create a market for those assets," the Times said, with the government guaranteeing a floor value for the assets.

The Wall Street Journal reported the administration had not exactly determined how the arrangement would work and "intends to hash out the structure with the private sector over the next few weeks," citing people familiar with the matter.

The Journal said the government's tool box also includes fresh cash injections into banks; a major expansion of a Federal Reserve program aimed at kick-starting consumer lending; and new programs to help "possibly" 2.5 million struggling homeowners.

However, the aid component for distressed homeowners remains sketchy, The Washington Post reported, citing unnamed officials.

The Obama administration was "not as far along on the part of the rescue plan that would spend 50 billion dollars to 100 billion dollars to help homeowners and may reveal only the broad outlines of that tomorrow."

Andrew Busch at BMO Capital Markets said that "overall, this plan has a lot of moving parts that may or may not work.

"I think the aggregator bank could be a way to re-capitalize banks in a stealth way as the Treasury overpays for the assets. They almost have to overpay to get companies to agree to give up the assets."