WASHINGTON – The Treasury Department is hastily designing a plan for its bailout of the mortgage industry and accepted bids yesterday to manage the $700 billion of assets it will buy from banks and credit unions.
But Treasury managers have yet to develop the details of the program, such as how they will buy the toxic assets, at what prices they will be purchased and how and when they will be sold back into the market, according to several sources familiar with the process.
The Treasury is accepting separate bids for the management of its portfolio of whole mortgage loans and portfolio of mortgage-backed securities, as well as for valuation of the assets to be acquired, and is expected to announce the winners as early as next week.
"They don’t have a process in place to implement the legislation," said Charles Felker, managing director of credit union bond house First Empire Securities, who was helping train bank examiners at the Federal Reserve on Tuesday about asset backed securities.
Felker, a former NCUA examiner who headed the agency’s investments division, said it appears the Treasury will be buying the distressed mortgage assets at a steep discount, then either managing them or auctioning them off. "They won’t be taking the stuff off the corporates’ hands at carrying value; there’s going to be some realized losses," he said, of the expectation that some of the corporates will participate in the program.
Meantime, Felker, whose firm represents more than 2,000 credit unions, said increasing numbers of executives are coming forward with troubled mortgage backed securities. "There are a lot more credit unions out there that hold these private label mortgage backed securities than what is commonly known," he told The Credit Union Journal. He cited an executive at a $100 million credit union who told him this week he was unaware that as much as $1 million of private label MBSs was privately issued. "They could take a shot to their net worth if they end up writing this stuff off."
On Tuesday Treasury Secretary Henry Paulson named Neel Kashkari, a one-time protege of his at Goldman Sachs & Co., to run the program, which is expected to begin buying distressed assets as soon as the next few weeks.
The Bush administration hopes the program will allow troubled institutions to offload non-performing mortgage assets and recreate an active market, so those institutions not participating can once again sell and buy mortgage assets.
While the program is open for all credit unions, corporates, which have run up as much as $10 billion in losses on their mortgage securities, will be the biggest beneficiaries in the credit union industry.
Since last Friday’s emergency passage of the bill, the Bush administration has announced several other steps to ease the credit crunch among banks and credit unions. They include a new program to buy short-term corporate debt, specifically commercial paper, that is also popular among corporate credit unions, and also to start paying interest on so-called sterile reserve banks and credit unions deposit with the Federal Reserve in order to maintain access to low-cost funding through the Fed’s discount window.
