May 14, 2009 / 8:42 PM / 10 years ago

FACTBOX: Obama administration tackles financial crises

(Reuters) - The Obama administration has acted on numerous fronts to boost economic activity, cleanse the banking system of toxic assets and toughen trading rules for instruments like derivatives, which have been blamed for fueling the credit crisis.

Here is a summary of key initiatives:

DERIVATIVES

Treasury Secretary Timothy Geithner proposed on May 13 that all over-the-counter derivatives dealers and other firms that create large exposures to counterparties be made subject to prudential supervision and regulation, which would include conservative capital, reporting and margin requirements.

Doing so will require legislation to amend the Commodity Exchange Act so regulators — specifically the Securities and Exchange Commission and Commodity Futures Trading Commission

— can impose recordkeeping and reporting requirements.

Currently, OTC derivatives don’t trade on exchanges, making it nearly impossible to monitor and supervise them, but the administration proposes requiring that all standardized OTC derivative products be centrally cleared.

These complex financial instruments have been linked to the current credit crisis, and officials hope tighter regulation can help prevent future troubles.

STRESS TESTS AND BANK RECAPITALIZATION

The Treasury and U.S. bank regulators, in a bid to restore investor confidence in the banking system, have demanded ten big U.S. banks add a combined $74.9 billion to their capital buffers as insurance against a worse than expected recession. The demand followed “stress tests” at the 19 largest lenders.

Of the ten, Bank of America (BAC.N) needs to raise $33.9 billion, Citigroup (C.N) needs $5.5 billion, GMAC (GM.N) needs $11.5 billion and Wells Fargo (WFC.N) needs to raise $13.7 billion.

Several banks have already announced plans to raise capital. If they cannot find the money in the market, the Treasury could tap the remains of the $700 billion financial rescue fund Congress approved last year. About $100 billion of that fund has yet to be allocated and officials expect healthy banks to return more than $25 billion they have already received, bolstering the fund.

AUTO INDUSTRY BAILOUTS

The Obama administration has used the rescue fund to extend substantial aid to the struggling U.S. auto industry.

It has given Chrysler LLC, which filed for Chapter 11 bankruptcy protection on April 30, $4 billion and has pledged at least $3 billion in bankruptcy financing.

General Motors Corp received $2 billion on April 24 on top of the $13.4 billion it received in December from the Bush administration. The Obama administration has reserved up to $3 billion more to see the company through a June 1 deadline to develop a viable business plan or face probable bankruptcy.

In addition, the administration has provided around $5 billion in aid to parts suppliers, and Geithner said May 8 the Obama administration would provide substantial support for troubled lender GMAC, a provider of financing to buyers of U.S.-brand cars. GMAC and the former Chrysler Financial have received nearly $7 billion in financial assistance.

STIMULUS PACKAGE

Obama signed into law on February 17 a $787 billion fiscal stimulus plan, including $287 billion in temporary tax breaks and $500 billion in spending on infrastructure, research facilities, energy projects and aid to states, the unemployed and the poor.

RESOLUTION AUTHORITY

The Treasury Department proposed in March that the Federal Deposit Insurance Corp be given the authority to “resolve” a wide range of financial firms — basically taking over firms that get into trouble and then either reselling them to healthy competitors or putting them out of business. The plan has hit opposition from bank industry groups and from some lawmakers who question the FDIC’s ability to handle the task.

The FDIC now has power to seize deposit-taking banks that get into trouble but not to take over non-banks and bank holding companies, like Citigroup.

FDIC Chairman Sheila Bair has opened discussions with lawmakers about the possibility for quick passage of a more narrowly defined authority that would give the FDIC power to wind down troubled bank holding companies but not a broader range of financial firms.

That idea is being resisted by Treasury and the Federal Reserve, which prefer keeping a broader definition of resolution authority and embedding it in a plan for comprehensive financial regulatory reform that the White House is expected to send to Congress within the next few weeks.

TOXIC ASSETS

To remove bad loans choking bank balance sheets and restart lending, the Treasury in March announced a plan to encourage the creation of private-public partnerships to purchase up to $1 trillion of so-called toxic assets.

The Treasury has earmarked up to $100 billion in seed capital from its financial rescue fund for the plan and will leverage this with a combination of loans from the Federal Reserve and the FDIC.

Investors will have to put up their own capital, which will be matched by the Treasury and then leveraged up to six times with FDIC-guaranteed debt for the purchase of old loans.

Investors interested in buying old asset-backed securities will follow a similar model but get the lending leverage from the Fed, which would use one of its emergency credit market support programs for firepower.

HOUSING RESCUE PLAN

The administration committed up to $275 billion in February toward helping homeowners refinance or modify existing mortgages. Declining home prices had put an estimated 4 million to 5 million “responsible” owners with 30-year mortgages in a spot where they couldn’t qualify for conventional refinancing because their loan-to-value ratio exceeded 80 percent.

Some $50 billion of the money came from the financial rescue fund, $25 billion would be absorbed by mortgage finance firms Fannie Mae and Freddie Mac, and the Treasury would provide $200 billion to boost Freddie and Fannie’s capital base if necessary.

Treasury is still modifying the program. On May 14, it said it will use $10 billion to sweeten incentives for lenders and mortgage services to address concerns that home prices may keep falling in high-cost areas.

Reporting by Mark Felsenthal, Alister Bull and Glenn Somerville; Editing by Kenneth Barry

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