WASHINGTON — The depth and breadth of the housing crisis is forcing regulators to consider and implement quickly some ideas that only recently were unthinkable.
The ink was barely dry on a massive bailout package passed by Congress last week when the Treasury Department began moves to invest directly in banks — details of which were expected to be released soon.
But many observers had already moved on to what other tools regulators might use to turn the tide. Those included letting more nonfinancial companies take stakes in banks, issuing government guarantees for interbank loans, ordering emergency audits of large institutions, and improving loan modification efforts.
Which of these ideas policymakers will use — if any — is unclear, but observers agreed that more is almost certainly on its way.
"Just knowing the way Treasury Secretary Henry Paulson has acted here — I can't think" the bailout "is the last thing that's going to be proposed," said Ron Glancz, a partner at Venable, Baetjer, Howard & Civiletti LLP.
Some observers said the government should move immediately to ease restrictions on companies that can own banks.
Christopher Whalen, managing director of Lord, Whalen LLC's Institutional Risk Analytics, said private-equity firms are "waiting on the sidelines" to invest in banks, though legal restrictions prevent them from doing more.
The Federal Reserve Board eased some of those restrictions last month, but many have clamored for regulators to go further.
"Anybody who's got fresh capital to bring to the banking industry should be welcomed," said Richard Levinson, senior partner at Canaras Capital Management LLC and the former treasurer of Citicorp.
Some said the Fed and the Treasury could write rules relaxing standards on what activities are considered "financial in nature," or they could rethink the traditional opposition to the mixing of banking and commerce.
V. Gerard Comizio, a partner at Paul, Hastings, Janofsky & Walker LLP, said regulators could prompt more investment from equity funds by easing the definition of "financial in nature."
Commercial companies are mostly banned from owning banks, except for industrial loan companies, but Mr. Comizio said it might make sense to convert failing banks into ILCs and let nonfinancial firms take control of them. The Fed has lobbied against commercial ownership of banks for years, but the housing crisis has already prompted policymakers to reverse long-held positions.
"It's not a charter that's going to fit everybody, depending on their business plan, but it's certainly a potentially viable option," Mr. Comizio said.
Observers said concerns about the mixing of banking and commerce could be addressed next year, when lawmakers are expected to propose a massive regulatory overhaul.
"We are in for a new round of regulations that would quite easily obviate the concerns you'd have when an industrial company owns a bank," Mr. Levinson said.
Regulators have also been focused on ways to resolve confidence issues among banks as the interbank lending market has dried up. Federal Deposit Insurance Corp. Chairman Sheila Bair has urged banks to lend to one another again, but some observers said regulators should agree to guarantee such loans.
Rather than buying troubled assets, "it would have been a better solution to leave the assets in place, enhance deposit insurance, take preferred stakes, and guarantee interbank lending," Mr. Levinson said. "Those would have been much better."
This week British Prime Minister Gordon Brown proposed that the Group of Seven countries agree to follow the United Kingdom's initiative and guarantee all interbank lending. Mr. Paulson seemed to shoot down hopes that this weekend's meeting of the countries' finance ministers would produce such a coordinated guarantee. He warned in a press conference Wednesday that the countries had too many important differences between them.
Raghuram Rajan, a professor of economics at University of Chicago, said an interbank lending guarantee could be temporary while the government conducts emergency audits to determine which institutions are healthy.
"We should audit all the banks very quickly," he said. "In the meantime, we should issue short-term guarantees for all the banks and in the end determine which banks are viable and which aren't."
The audits would provide a nearly instantaneous sense of transparency to the marketplace, Prof. Rajan said, giving banks renewed confidence that they could choose the correct counterparties for short-term borrowing and lending.
Observers and industry representatives said that regulators could also use new powers granted under the bailout bill to improve modification efforts. Modifications could reduce defaults and stabilize home prices. The Treasury is allowed to buy up loans and mortgage-backed securities. Whole loans would be straightforward enough to modify, but they are harder than other assets to price and may therefore take longer to purchase. Securitized mortgages, which are often bound up in pools called collateralized debt obligations, would be easier to buy, but the individual loans would be harder to modify.
Chris Low, the chief economist at First Horizon National Corp.'s FTN Financial Capital Markets, said loans inside CDOs could be modified faster if the government were careful to buy every part of a CDO (which is split into sections called tranches, each with a different credit rating). Buying all the tranches would remove a legal barrier to modifying the loans in the pool.
"You can't force modifications that are going to effect the securities held by other people," he said.
Ms. Bair has said the Treasury could also use power granted in the bailout legislation to offer credit enhancements and to guarantee loans for institutions that agree to certain steps, such as a systematic modification program.
Other experts are pushing for a more global response to the crisis.
Kenneth Thomas, a lecturer in finance at the University of Pennsylvania's Wharton School, is advocating for coordinated fiscal action by the Group of Seven countries. This weekend's meeting of finance ministers could be that chance, Mr. Thomas said. He advocates the formation of a fund of $3 trillion to $5 trillion that would display the unanimous commitment by the countries to back their financial systems.
That way, "all the market participants would see all the governments are standing together," he said. "Globalization can no longer be a buzzword. We've got to do something. 'Too big to fail' has got to apply to the major financial markets, the major financial institutions, and the major financial instruments."
Mr. Low said getting global markets under control would be crucial to U.S. stability. "As long as Europe remains in the turmoil that it's in, the money markets over here are not going to calm down to where they were before," he said.
Regardless of what happens next, observers agree it will take several more attempts to solve the crisis. "At this point, for better or worse, the government is likely in the short term to basically preserve as many options as possible to potentially intervene in order to promote market stability," Mr. Comizio said.
