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Bailout program due for overhaul

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February 10, 2009

The Obama administration, seeking to deal with the political outrage over the handling of the government’s $700 billion financial rescue program, plans to impose tough new standards on future payments to banks. It is also greatly expanding an effort to unclog credit markets to provide loans to consumers and businesses.

Funding to unfreeze borrowing in such areas as credit card debt, auto loans and student loans, will see a huge increase — from $20 billion to $100 billion, according to administration officials who spoke on condition of anonymity because the program had not yet been publicly announced.

The officials said the increase, combined with a program operated by the Federal Reserve, would be enough to support an additional $1 trillion of lending in this area. Officials said the program would also be expanded beyond consumer and small business loans to cover loans for commercial real estate projects.

Treasury Secretary Timothy Geithner said that the new plan was intended to change the "dangerous dynamic" of a financial system that was impeding economic recovery rather than supporting it.

"It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," Geithner said in excerpts of remarks obtained by The Associated Press. "We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families."

Geithner is scheduled to unveil the new plan Tuesday. The major overhaul of the program begun by the Bush administration seeks to address widespread criticism that banks were getting billions of dollars in taxpayer support with few strings attached and that all the government aid was failing to deal with the worst financial crisis to hit the country in seven decades.

Under the overhaul, the administration will seek to deal with those issues by more closely monitoring banks to make sure the money they receive is being used to increase lending.

The biggest banks participating in the program will also have to undergo a stress test of their balance sheets to ensure they are in sound enough condition to receive additional government support.

The administration’s new plan, officials said, will include a government-private sector partnership aimed at removing toxic assets from banks’ balance sheets, although the details on how this program would operate were still being worked out.

Treasury officials suggested two approaches that the administration is considering, according to congressional staffers who were briefed on the plan Monday night and also spoke on condition of anonymity before the program was unveiled.

These aides said the government might provide guarantees for the bad assets to establish a floor on possible losses, or perhaps provide low-cost financing through the Federal Reserve for investors willing to purchase the bad assets.

President Barack Obama, speaking at a prime-time news conference Monday night, said his overhaul of the financial rescue program would bring "transparency and oversight" to the heavily criticized program.

He said the overhaul would correct previous mistakes such as a "lack of consistency" and what he said was the failure to require banks to show "some restraint" in terms of executive compensation and spending in such areas as corporate jets.

Congress passed the financial rescue bill on Oct. 3 and the first $350 billion in the program was committed by the Bush administration under the direction of former Treasury Secretary Henry Paulson.

However, that effort generated a huge political backlash with critics charging that the Bush administration failed to impose enough restrictions on banks to make sure they used the billions of dollars they were receiving to boost lending and keep the country from toppling into an even deeper recession.

In part because of the political outrage, the Obama administration decided against seeking any additional money beyond the $350 billion left to be spent as part of its initial overhaul. Many economists believe that $700 billion will not be enough to get the financial system operating normally and that the administration will eventually have to ask for billions more, pushing the ultimate price tag for the rescue to $1 trillion or more.

Asked about the possibility that his administration will ultimately need more money, Obama said Monday that the goal now is to "get this right" because it was important to restore financial market confidence so banks will resume more normal lending.

Officials, speaking on condition of anonymity before the plan’s release, said it would include the following major elements:

_Continued government purchases of stock in banks as a way to bolster banks’ balance sheets. The new stock purchases will come with tighter oversight to make sure banks are using the government support to increase lending. The new requirements will not apply to banks that have already received support.

_A government-private sector partnership aimed at encouraging private investors to buy banks’ bad assets, although details were yet to be fully worked out.

_Provision of at least $50 billion of the remaining $350 billion rescue fund to bolster government efforts to help homeowners deal with rising foreclosures in the current steep housing slump. The actual details on the housing measures were being delayed for an announcement in the coming weeks.

The mortgage support would be a major policy shift from the Bush administration, which relied on voluntary, industry-led measures and did not want to commit taxpayer dollars to foreclosure prevention. The administration was still reviewing various proposals on exactly how the new anti-foreclosure efforts would be implemented.

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AP Real Estate Writer Alan Zibel contributed to this report.

2 Responses to Bailout program due for overhaul

  1. AustinRanter

    February 12, 2009 at 2:57 am

    Just A Suggestion or Two…

    Several ways to reform the bailout are:

    Demand that before any banking institution gets any money they must first break up ownership of massive numbers of branches. limit the branches to say no more than 25 per banking corporation. That way should there ever be a national financial or market crisis there will a much less chance of any one bank corporation to fail…taking with them billions…or even trillions of assets and causing a mass layoff of employees…and ultimately hitting hard larger numbers of commercial customers who stand to lose subtantial money because of limited FDIC protection.

    Small banks across the country have been failing for years…right before our eyes and it’s never been an issue before.

    And…require that banks carry their individual in-house loan risks and not be able to bundle those risks and sell them off as Credit Swaps. Also place a limit on loss insurance for those loans (aka Derivatives). That way the insurers will reduce their losses substantially.

    End subprime lending practices…period. For individuals or married couples who are low income or high credit risk, they must apply for and acquire loans through a special government backed lending system. There will be a limited number of defaults allowed for each fiscal year. When the default number reach the limit…then loans are suspended until 80% of collateral is recovered…or until the end of the fiscal years hits. The defaulted collateral must be equally dispersed among all private real estate companies within a given area to sell.

    Never allow Wall Street tje ability to speculate with any aspect of banking or insurance credit risks or assets related to real property.

    Private insurance companies can no longer sell derivatives to banks to protect their loans. FDIC should take over that roll. Banks will continue to pay a fee for default insurance…and the unused portions of premiums (or profit if you will) collected will be used to pay against bailout money.

    All in all…the above would keep private interest way more in tact.

    That’s my 2 cents…and I don’t have a clue about what I’m talking about…how about you?

  2. AustinRanter

    February 12, 2009 at 2:45 am

    Oh…one poster suggested Credit Card companies only be allowed to charge a max of 12% to even the highest risk customer.

    Considering that a huge number of customers now pay the max of 28.9 percent…which holds them as indentured servants…would create substantially less payments for credit cards…and those consumers would be pumping much, much more disposable cash into the economy.

    Dunno…whata think?