Providing a glimpse of things to come, Treasury Secretary Tim Geithner has outlined the broad Financial Stability Plan, which aims to reopen the flow of credit, strengthen banks and provide aid to troubled homeowners. What the plan lacked in detail – some components, such as the foreclosure prevention piece, included only a very general indication of what the Treasury has in mind – it made up for in scope.
‘We will be guided by the principles of transparency and accountability, dedicated to the goals of restoring credit to families and businesses, and committed to moving our nation towards an economic recovery that is as swift and widespread as possible," Geithner said in prepared remarks. He conceded that the plan – which includes increasing the as-yet-implemented Term Asset-Backed Securities Loan Facility (TALF) to up to $1 trillion – will be expensive and risky, emphasizing that it must also be malleable in nature.
"We will have to adapt our program as conditions change," he said. "We will have to try things we've never tried before. We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted."
Under the plan, financial regulators will conduct a comprehensive stress test to determine the level of capital assistance necessary to ensure banking institutions continue lending. Participation will be required for banking institutions with assets in excess of $100 billion.
While the plan encourages accessing private capital to shore up lending, a Capital Assistance Program offered by the Treasury will provide participating banks with a "capital buffer" to help absorb losses and serve as a bridge to receiving increased private capital. A Financial Stability Trust will be formed to manage the government's investments in financial institutions.
The Financial Stability Plan also calls for establishing a Public-Private Investment Fund that will provide government capital and financing to help leverage private capital. "By providing the financing the private markets cannot now provide, this will help start a market for the real estate-related assets that are at the center of this crisis," Geithner said, adding that the objective is to use private capital and asset managers to provide a market mechanism for asset valuation.
"We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it," he said. "We believe this program should ultimately provide up to $1 trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works."
The Financial Stability Plan expands TALF by allowing the Treasury to use $100 billion to leverage up to $1 trillion of lending from the Federal Reserve. Purchases will be limited to newly packaged AAA loans in an effort to safeguard taxpayer resources, the Treasury says.
And while the facility previously focused on student, auto, small business, credit card and other types of consumer loans, the plan announced by Geithner broadens TALF to include commercial mortgage-backed securities. The Treasury indicated that it will consider further expanding the facility to include non-agency residential mortgage-backed securities and assets collateralized by corporate debt.
President Obama's economic team has been asked to develop a comprehensive plan to address the housing crisis, Geithner said, and details will be forthcoming. A fact sheet provided by the Treasury indicates that lowering mortgage rates by purchasing government-sponsored enterprise (GSE) mortgage-backed securities and GSE debt will remain a priority, as will committing $50 billion to reduce monthly mortgage payments "in line with prudent underwriting and long-term loan performance."
Loan modification guidelines and standards for government and private programs will be established, and Hope for Homeowners and the Federal Housing Administration will be made more flexible in order to broaden eligibility for loan modifications, the sheet notes. All Financial Stability Plan recipients will be required to participate in foreclosure mitigation plans consistent with guidance from the Treasury, Geithner added.
Hoping to avoid the transparency and accountability issues that plagued the initial deployment of the first half of TARP funds, the Financial Stability Plan also includes a slew of conditions that make public how government funds are used. All information disclosed or reported to the Treasury by recipients of capital assistance will be posted on www.FinancialStability.gov.
To ensure that capital invested by the government under the Financial Stability Trust goes to improving banks' capital bases and promoting lending, the Treasury says it will restrict banks from repurchasing any privately held shares, pursuing acquisitions of healthy firms and paying quarterly common dividend payments in excess of $0.01 until the government's investment is repaid.
SOURCE: The U.S. Treasury