January 30, 2009 / 12:35 AM / in 9 years

U.S. to unveil menu of bank fixes next week: source

WASHINGTON (Reuters) - The Obama administration aims to roll out a menu of options next week to help stabilize the U.S. banking industry, with government aid tailored to individual banks’ needs, a source familiar with the administration’s thinking told Reuters on Thursday.

President Barack Obama (R) meets with Treasury Secretary Timothy Geithner in the Oval Office at the White House in Washington, January 29, 2009. REUTERS/Jim Young

The source, who spoke anonymously because the plan is still being finalized, said the options are likely to include a “bad bank” that could soak up mortgage securities and other distressed investments weighing down banks’ balance sheets and holding back new lending.

The plan would also include government insurance on a select portfolio of banks’ troubled assets to help shield banks from future losses.

A third component would be capital injections by the government in exchange for common shares, rather than the preferred shares and warrants taken so far under the Treasury Department’s $700 billion Troubled Asset Relief Program (TARP).

Issuing new shares of common stock to the government would help banks protect their balance sheets, as banks are forced to subtract losses from their common equity.

The White House declined to comment.

The administration hopes to unveil the plan as early as Tuesday or Wednesday, according to the source.

“They’re hoping to lay out a menu of options that would provide flexibility and creativity,” the source said. The plan would not be a one-size-fits-all approach but would attempt to tailor assistance based on an individual bank’s needs.

CNBC reported there were round-the-clock meetings between government officials and senior bank executives over the “bad bank” idea but the talks had hit a snag because consensus could not be reached over how it would work.

The government faces a tough task in trying balance the interests of bankers and taxpayers in setting up a bad bank to soak up the bad assets.

If the government values the assets too high, the taxpayer would be unduly burdened. If they are priced too low, an accounting tsunami would be set off as other banks are forced to write down assets on their own books.

The total cost of the new bank rescue program remained unclear, according to the source.

Sen. Charles Schumer, a New York Democrat, said on Thursday that some experts think creating a “bad bank” to buy toxic assets could require as much as $4 trillion.


For weeks, top U.S. policymakers have been discussing the idea of a ‘bad bank’ to help stabilize the struggling U.S. banking industry.

Nonperforming loans on U.S. banks’ balance sheets are seen as a key reason why banks are reluctant to resume lending. The lack of credit has contributed to a year-long recession sparked by the collapse of the housing market.

U.S. Vice President Joseph Biden said on Thursday that “all alternatives” were being considered to stabilize the banks.

But he criticized big bonuses collected by executives working for banks that accepted government bailout money. The New York comptroller reported this week that Wall Street firms paid out some $18.4 billion in bonuses in 2008 and urged the Obama administration to examine the issue closely.

“I’d like to throw these guys in the brig,” Biden said in an interview with CNBC television. “They’re thinking the same old thing that got us here -- greed.”

Lawmakers from both political parties have criticized how the TARP program was run under the Bush administration.

The valuation problem was widely seen as the reason former Treasury Secretary Henry Paulson abandoned his original TARP plan to buy up banks’ toxic assets.

The administration is looking at three different valuation methods, the source said. One would price the assets based on comparable assets that are still performing, another would use a computer model based on independent analysis, and the third would rely on bank regulators’ assessments.

On Tuesday, the U.S. House Financial Services Committee is scheduled to hold a hearing on ways to promote bank liquidity.

Additional reporting by Caren Bohan; Editing by Tim Dobbyn

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