WASHINGTON — The rapidly evolving financial crisis has made Bush administration officials and banking regulators participants in an almost regular weekend routine of hastily scheduled meetings and press briefings to discuss the latest moves to shore up the sector.
It's an approach that has some outsiders wondering when crisis management will give way to plans that yield structural solutions.
"If you look at the actions over the last two weekends, there is no apparent grand strategy from government officials," said Fred Cannon, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "This is crisis management. … It gets to the point if we jump from one crisis to another, how do we stop this? How do we jump in front of this?"
Even if the administration has not articulated it as such, the bones of an overarching solution to the housing crisis do seem to be coming together. Treasury Secretary Henry Paulson has insisted that the seizure of Fannie Mae and Freddie Mac will curb the decline in home prices that has resulted in massive bank losses.
"The root of the problem lies in this housing correction," Mr. Paulson said during a White House press conference Monday. "And that is why the actions with respect to Fannie Mae and Freddie Mac are so extraordinarily important … to making sure we have plenty of financing in housing."
The administration pressed hard for the July law that, starting Oct. 1, will lead the Federal Housing Administration to begin refinancing underwater mortgages. The Treasury has also championed the Hope Now program, which has helped about 80,000 homeowners modify their mortgages. Finally, Mr. Paulson has laid the groundwork for a financial regulatory revamp by, among other things, suggesting that the Office of Thrift Supervision be eliminated and that the Federal Reserve Board become a systemic risk regulator.
The President's Working Group on Financial Services met with President Bush on Tuesday to continue discussing options.
But with the demise of two more investment banks this weekend, calls for something bolder are intensifying.
One of the leading options is the creation of an agency that would absorb some of the industry's worst assets and sell them at a discount. The model is the Resolution Trust Corp., which Congress was formed in 1989 to sell assets from failed savings and loans.
"The RTC ended up with the difficult-to-value assets and then, over the space of basically about six years, did what it could to dispose of them," said Lawrence White, a professor at New York University's Stern School of Business.
But an RTC-like structure might not work in today's market, where securitization has led to many owners holding pieces of the same mortgage.
"The RTC was dealing with physical, hard assets: commercial real estate, commercial property," said Michael Greenberger, a law professor at the University of Maryland.
"Here the RTC would be trying to sell what are essentially junk bonds," such as collateralized debt swaps and mortgage-backed securities, "that are virtually valueless," Prof. Greenberger said. "A bank might have built a hotel in the old savings and loan scandal that nobody was using, but at least it's a physical structure."
Policymakers have several other options to help the industry survive the market turmoil, such as easing mark-to-market accounting rules, especially for hard-to-value assets like some mortgage-backed securities.
"If a bank holds MBS and holds them to maturity, it seems foolish for the accountants to write them down and wipe out capital in the process," said Bob McTeer, a distinguished fellow at the National Center for Policy Analysis and the former president of the Federal Reserve Bank of Dallas. "They ought to find a way to relax the accounting rules or apply them with more common sense."
Another alternative: lifting barriers to investing capital in the banking system. Many observers say the Fed and other policymakers have spent more time focusing on liquidity, by altering the discount window, than on helping boost capital.
The Fed is weighing whether to relax rules to let private-equity firms take larger stakes in banks. Currently investors who hold 10% to 25% are subject to some Fed regulation, including restrictions on their ability to control the bank. Investors that hold more than 25% must register as a bank holding company. The Fed could issue a rule as early as this month giving more flexibility to investors who own between 10% and 25% of a bank.
Brian Gardner, an analyst at KBW, said that type of approach is needed.
Regulators "have been talking about banks raising capital, but yet they haven't introduced any flexibility on their rules on restrictions on capital going into the system," he said. "Liquidity is not enough. It's a capital issue, and they are going to have to take down some of these artificial barriers."
Others advocate more radical solutions.
Christopher Whalen, the managing director of Lord, Whalen LLC's Institutional Risk Analytics, said the government should support the Federal Deposit Insurance Corp. with a $500 billion backstop. Concerns have grown that the Fed's decision to allow banks to lend directly to their affiliates, such as investment banking units, could increase the risks facing the Deposit Insurance Fund.
A more probable outcome is the regulatory revamp that the Treasury has been pushing.
"The regulatory model ought to be more comprehensive and more banklike," said former Comptroller of the Currency Eugene Ludwig, now the chief executive of Promontory Financial Group LLC. "The unanswered questions are who does the supervision and how, but the answers won't come until the current crisis is under control."
The pressure is on to finally bring stability to the banking sector, but the efforts could be complicated by a growing perception that the market still has a way to go before hitting bottom.
"The looming issue is the credit crunch," Mr. Ludwig said. "We've already seen significant credit contractions. We urgently need to unstop the credit markets."
Senate Banking Committee Chairman Chris Dodd said Tuesday that he wants Congress to be ready to intervene in the financial crisis this year, and he urged the Fed to become more proactive in ensuring struggling homeowners are spared from foreclosure.
At a press conference, Sen. Dodd said he has asked Senate Majority Leader Harry Reid to keep the Senate in a "pro forma" session the rest of the year, so it can step in with a response if market conditions dictate, and recess breaks do not block lawmakers from reacting to administration actions.
"I want the ability to reconvene my Banking Committee as events unfold and bring before the committee members of the administration and others as we further examine what options we ought to be taking," Sen. Dodd said.