Obama team weighs government bank to ease crisis
Saturday January 17, 2009
By Tim Ahmann
WASHINGTON (Reuters) - The incoming Obama administration is considering setting up a government-run bank to acquire bad assets clogging the financial system, a person familiar with the Obama team's thinking said on Saturday.
The U.S. Federal Reserve, Treasury and Federal Deposit Insurance Corp have been in talks about ways to ease a banking crisis that is once again deepening -- and a government-run "aggregator bank" is among the options.
Outgoing Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair both said on Friday a government bank was one of a number of ideas U.S. regulators had been discussing.
The source said advisers to President-elect Barack Obama, who takes office on Tuesday, were also considering the idea of an aggregator bank among a range of options that could be pursued.
David Axelrod, a top adviser to Obama, told Reuters the new administration would have something to say about a fresh approach to the financial crisis in "the next few days."
"I'm not going to get into the structure of how we're going to approach the revamped financial rescue package," Axelrod said after speaking to a conference of mayors in Washington.
"What we have to do is approach this with a lot more transparency on the front end."
In addition to steps to bolster banks, Obama officials want to aggressively attack the underlying causes of the credit crisis: the sharp downturn in the U.S. housing market and the related deterioration in mortgage-related assets.
"There are a range of things we're going to have to do to stabilize the financial community and part of it is going to involve housing, and part of it is going to involve how we approach this issue generally," Axelrod said.
BACK TO THE FUTURE
In outlining the idea of an aggregator bank on Friday, Bair and Paulson said the government could use money from the Treasury-administered $700 billion financial rescue fund to capitalize a new institution that would be able to absorb toxic assets now weighing down bank balance sheets.
The hope would be that taking these bad assets off the hands of banks would allow the banks to attract badly needed private capital and renew lending, the original intention behind the bailout fund known as the Troubled Asset Relief Program (TARP).
"I think the key thing is assets purchases, and if you buy something, you have to put it somewhere," said Mark Zandi, chief economist at Moody's Economy.com.
A surge in U.S. mortgage defaults led to a global credit crisis that has raged since the summer of 2007. Last week, Goldman Sachs estimated that losses worldwide could mount to $2 trillion, about double what has been realized so far.
British Prime Minister Gordon Brown told the Financial Times on Saturday that banks need to reveal the true size of their losses as a step toward moving past the crisis.
While officials have been discussing leveraging money from the U.S. bailout fund, it is not clear whether the fund is large enough for the task at hand.
"They may very well have to come back to ask (Congress) for TARP Two," Zandi said.
Fed Chairman Ben Bernanke said on Tuesday it was critical to bolster the banking system as a complement to the effort underway in Washington to enact a huge package of tax cuts and spending to lift the recession-mired economy.
"Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system," Bernanke said, laying out three possible ways to aid ailing banks.
The government could buy the assets, perhaps through so-called reverse auctions, as originally planned, but analysts said that is an extremely complicated endeavor and it no longer seems to have traction among policy-makers.
Bernanke also said the government could offer guarantees against losses on assets that would be ring-fenced but remain on bank balance sheets, a tactic the government has used to help Citigroup and Bank of America.
The third option would be to set up bad banks with government cash, an approach similar to the U.S. Resolution Trust Corp, which liquidated almost $400 billion in assets from more than 700 insolvent savings and loans institutions from 1989 to 1995.
(Additional reporting by Jim Wolf; Editing by John O'Callaghan)