Geithner Seeks Private Investment for Toxic Assets

Feb. 9 (Bloomberg) -- Treasury Secretary Timothy Geithner is seeking to draw investors into the U.S. financial-rescue program, aiming to add private funding as a new component of proposals to address the toxic debt clogging banks’ balance sheets.

Aides worked through the weekend to complete the package that Geithner will announce tomorrow in Washington, which was delayed by a day. Aspects of the plan that have been settled include a new round of injections of taxpayer funds into banks, targeted at those identified by regulators as most in need of new capital, people briefed on the matter said.

The toughest issue has been the one Geithner’s predecessor failed to address: the illiquid assets that caused the credit crunch. A leading proposal is a so-called aggregator bank, featuring investors such as hedge funds and private equity, that may issue Federal Deposit Insurance Corp.-backed debt, the people said. It’s unclear how big a role there will be for guarantees of securities that stay on banks’ balance sheets.

“We have to reach a point where investors and consumers have greater confidence in our financial system,” Philadelphia Federal Reserve Bank President Charles Plosser said in an interview. “Without that, these institutions will not be able to attract new capital or be able to fully resume their important role in providing credit.”

Congressional Briefing

Treasury officials told congressional staff late today that the plan for an aggregator bank would have an initial capacity of as much as $500 billion, according to one Democratic and one Republican congressional aide. A second component will be $50 billion to help stem foreclosures, they said.

A Treasury spokeswoman wasn’t immediately available for comment on the numbers.

Officials said yesterday the one-day delay for Geithner’ speech was to allow the administration to focus on getting Senate approval of President Barack Obama’s fiscal stimulus. Geithner is scheduled to unveil the effort at 11 a.m. tomorrow.

A Federal Reserve program designed to spur consumer and small-business loans will be expanded as part of tomorrow’s package, possibly to include real-estate assets, the people said.

For now, the government doesn’t intend to ask for more money, while leaving open the option of requesting more later. Most of the second half of the $700 billion Troubled Asset Relief Program has yet to be allocated, an amount that economists have said is unequal to the task of shoring up the financial industry.

‘Not Working’

“Credit markets in this country are not working right” and “we’ll do what is necessary” to start a process of repair, Lawrence Summers, director of the White House National Economic Council, said on ABC television’s This Week program yesterday. Asked if the administration may come back to ask for more money down the road he said “we’ll see what happens.”

Regulators plan to subject banks deemed most important to the financial system’s stability to a new test to determine whether they have enough capital, according to a person familiar with the matter. The President’s Working Group on financial markets, which includes the Fed, FDIC, Securities and Exchange Commission and Commodity Futures Trading Commission, will develop the examination’s guidelines, the person said.

Firms that fail the test will receive more capital injections from the government, the person said. Banks that couldn’t repay the money over a period of time could be liquidated, placed into receivership or have their assets retired by officials over time.

Sales Effort

Geithner will try to sell the plan as a clean break from the Bush administration, while offering many of the same programs and policy tools bequeathed by former Secretary Henry Paulson.

The round of equity injections planned will contrast with Paulson’s initial push to make new capital available to all banks, and the firms that get additional money will be faced with tougher terms, people briefed on the matter said.

“We’ve got to characterize this not as saving the banks, but saving the economy in terms of the credit that flows in this country,” Senator Claire McCaskill, a Missouri Democrat, said yesterday on NBC’s Meet the Press.

The FDIC is expected to play a role either running or financing some bad bank type of unit that takes on illiquid securities, which may sell its own government-backed debt, the people said.

FDIC Credit Line

Also this week, officials may seek to boost the FDIC’s credit line with the Treasury to $100 billion from $30 billion. The FDIC’S deposit-insurance fund is diminishing as it takes on more failed banks.

Geithner’s plan may include an asset-guarantee element similar to previous deals arranged for Citigroup Inc. and Bank of America Corp., while it’s not clear how big a role such insurance would play in tomorrow’s announcement, the people said.

The new approach comes four months after the start of the $700 billion TARP, which both Democrats and Republicans have criticized as ineffective. The task Geithner faces is reviving a U.S. banking system throttled by $752 billion in credit losses and an economy that lost almost 600,000 jobs last month.

Economic news this week is expected to show a further deterioration. Sales at U.S. retailers probably fell in January for a seventh straight month, capping the longest slide since comparable records began in 1992. The Commerce Department report will probably show purchases declined 0.8 percent, according to the median estimate in a Bloomberg News survey.

Economy Deteriorates

A Labor Department report last week showed the U.S. unemployment rate climbed to 7.6 percent, its highest level since 1992. White House Council of Economic Advisers Chairman Christina Romer warned last week that the rate may climb to 10 percent or higher without approval of Obama’s stimulus package, which exceeds $800 billion.

With the economic downturn deepening, attracting private money to the financial industry may be difficult. The Standard and Poor’s 500 Banks Index has fallen 33 percent since the start of last month, and 65 percent in the past year. It rose today, closing at 91.20.

Bank of America plunged 57 percent in the past month, closing at $6.58 last week even after the government agreed to backstop a portfolio of more than $100 billion of its assets. Citigroup, which got a joint federal guarantee for investments in excess of $300 billion, closed at $3.91.

The Obama administration will seek to “catalyze and spur private investment” to help solve the crisis, Summers said in an interview on Fox News Sunday.

‘Looking for Clarity’

Banks are “looking for clarity, we’re looking for this to be the complete package,” said Wayne Abernathy, an executive vice president at the American Bankers Association in Washington. “If they don’t have the details spelled out they will just freeze the market.”

Housing programs will be a key element of the administration’s plan, though may be announced separately from the bank-rescue rollout. House Financial Services Committee Chairman Barney Frank said yesterday that Obama will steer “substantial” funds to stem foreclosures as the administration prepares to unveil its plan for stabilizing the economy.

“A major part of what you’re going to see from the Obama administration is an effort to put substantial money into reducing foreclosures,” Frank, a Massachusetts Democrat, said on NBC’s “Meet the Press.”