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The Obama administration is expected to announce details of its financial rescue plan as early as next week, a plan that likely will involve creating a so-called bad bank to buy toxic assets from troubled banks.
The Federal Deposit Insurance Corp. is pushing to run the bad bank. Chairman Sheila Bair says the agency has the know-how and could help finance the effort by issuing bonds guaranteed by the FDIC. The argument is that taking bad assets from banks, and managing and selling them, is at the core of what the FDIC does.
The bad-bank plan may enable the federal government to rewrite some of the mortgages that plague banks' bad debt, with the goal of easing a crisis that has stripped more than 1.3 million Americans of their homes. Some lenders may be taken over by regulators as the government seeks to provide a shield to taxpayers.
Obama is under rising pressure to overhaul the $700 billion Troubled Asset Relief Program for the ailing industry. While setting up a bank to buy problem assets is growing as a favored approach, it could drive up the cost of the rescue to more than $1 trillion.
Treasury Secretary Timothy Geithner, who was sworn in earlier this week, has pledged to unveil a detailed plan for responding to the crisis that will aid financial companies as well as small businesses, cities unable to borrow money and families facing home foreclosure.
The new administration also is pressing Congress to pass an $825 billion economic stimulus, which could complicate any effort to get additional bailout funds from lawmakers.
Concerning the bad bank, a key question is how to value the toxic assets it would buy. Geithner, in a hearing last week before the Senate Finance Committee, outlined three possible alternatives: look at how the market is pricing similar assets; use computer model-based estimates from independent firms; and seek the judgment of bank supervisors.
Federal Reserve Chairman Ben S. Bernanke suggested last fall that the government should purchase them at values above the near fire-sale prices prevailing in the market. Bernanke, who has endorsed the idea of a bad bank, is discussing new strategies for combating the financial crisis with his central bank colleagues this week. The Fed's Open Market Committee will release a statement later today.
Bair has said that cash from the TARP may help capitalize the bad bank and that commercial lenders may kick in some money of their own. One possibility that's been discussed is issuing firms some kind of stock in the new organization as partial payment for their impaired assets.
In any rescue efforts, the Treasury is likely to continue to require banks to hand over ownership stakes to the government as a condition of receiving aid. Programs so far have sought preferred shares and warrants, which can be converted into common stock and cashed out on the government's request.
