WASHINGTON — For the first time, the Bush administration on Monday took advantage of power it won from Congress last month and bought more than $40 billion of troubled assets.
But it was not the broad asset purchase originally envisioned. Rather, the "troubled asset" was the stock of a single company — American International Group Inc. — and observers said it could also be the last time the authority is used.
In the five weeks since Congress authorized the Troubled Asset Relief Program, the Bush administration has done everything but buy troubled assets. Though it was expected to have done so by now, the Treasury Department has not explained how it will price assets nor hired any managers to oversee them.
Observers claim the lack of progress is hurting the market.
"The program was supposed to be a great thing for everybody, but frankly the lack of clarity and the lack of decision-making has done nothing but hurt the market," said Tom Hamilton, the managing director of asset-backed, mortgage-backed, and commercial-mortgage-backed securities at Barclays Capital. "There's less care about the direction it goes and more care about 'just tell us what it is so everyone can start to move forward.' "
But Neel Kashkari, the Treasury's interim assistant secretary for financial stability, did not even mention the troubled-assets program in a speech in New York Monday. Most of his remarks to the Securities Industry and Financial Markets Association covered well-known information on the administration's program to inject up to $250 billion of capital into healthy banks.
In a panel discussion at the conference, Greg Peters, the chief U.S. credit strategist at Morgan Stanley, said, "The idea behind Tarp is price discovery." But "direct capital injections cannibalize that process," he added.
After his speech, audience members pressed Mr. Kashkari for more information on the asset-purchase program. He made clear that nothing widespread is imminent.
"This morning's action with AIG was a one-off event necessary for financial stability," he said. "We worked very hard with Congress to design legislation to have broad authority so we can have multiple tools … and asset purchases are a form of that tool. Capital purchases [are] another tool. Ultimately, Secretary [Henry] Paulson will make the decision on when to roll out which tools."
That hardly reassured Gerald Cassidy, the managing director of bank equity research at the RBC Capital Markets unit of Royal Bank of Canada.
"I'm a little disappointed from what we heard earlier that the purchase part of the program that was initially announced, in terms of buying structured products, whole loans, as well as securitized products, that there's no definitive date on when that's going to start," he said. "Now, that's a critical part to get credit flowing again."
Tarp was pitched to Congress as a way to remove many of the worst assets from bank balance sheets. But in practice, the administration has focused far more on giving banks capital.
Randall Quarles, a managing director at Carlyle Group who was a Treasury under secretary in the current administration, said asset purchases would do more to stabilize the industry than capital injections.
"Institutions are realizing in this environment they do need to anchor confidence, and I don't think capital injections will be found to be a useful anchor of confidence," he told the same New York conference. "The risk of politicization of the allocation of Tarp capital is too great."
Fans insist that Tarp's original goal of buying assets and taking them off balance sheets remains crucial.
"The urgency of implementing the purchase program can't be overstated," said Chris Flanagan, the managing director and head of structured products research in the securities unit of JPMorgan Chase & Co. "Residential mortgage is where the problem started and it's where the solution needs to be addressed."
Asset purchases "are the only things that make sense," said Peter Wallison, a former Treasury general counsel during the Reagan administration who is now a fellow at the American Enterprise Institute. "If you add capital to the banks, you don't necessarily solve the problem of investors' worrying about solvency. The best thing to do is take those assets out of the bank entirely."
But though the idea seems to have significant support, observers conceded that the Treasury faces big hurdles. Perhaps the biggest is how to value assets for which there is currently no market.
"Valuation is exceedingly difficult," said George Kaufman, a finance professor at Loyola University in Chicago. "You have a very narrow market, and we don't know where to value things at. You don't want to pay too much and create a subsidy, and you don't want to go too low because then no one will sell."
The sheer operational demands on the Treasury are huge. In recent months, it has had to rescue Fannie Mae and Freddie Mac, money market mutual funds, and the commercial paper market.
"You've got a Treasury that's extremely stretched out," said Robert Clarke, a former comptroller of the currency who is now a senior partner at Bracewell & Giuliani LLP. The asset purchase plan "has a lot more moving parts than the capital program. … It's just hard to get something like this implemented when you've never done it before."
Still, V. Gerard Comizio, a partner in Paul, Hastings, Janofsky & Walker LLP, said the job before the Treasury is not impossible. After all, he said, plenty of asset managers are willing to do the work for the government.
"There is a long line of folks interested in managing this if the Treasury gets into this business," he said.
The Treasury's focus on capital at the expense of asset purchases is one of a series of instances in which the administration has said it will fight the financial crisis one way, only to switch course.
Joe Mason, a professor at Louisiana State University, said this variability is creating a credibility problem for the agency. He predicted the asset-buying program will never materialize.
"This was unworkable to begin with," he said. "The scheme was not well thought out, and we're realizing that."
The administration's latest move on AIG is essentially the third government bailout for the insurance giant since September, when the Federal Reserve Board gave it an $85 billion loan that would mature in two years.
The Federal Reserve Bank of New York added $38 billion to that facility last month in an effort to buy securities from AIG.
The insurer will now have five years to repay the loan, and the interest rate was cut to 300 basis points over the London interbank offered rate, instead of the initial 850. The Fed also created two limited liability companies to buy troubled AIG assets. The first, with $22.5 billion from the Fed, will buy residential mortgage-backed securities, and the second, with $30 billion, will buy collateralized debt obligations.
