The Obama administration has now veered away from a bad bank plan and is putting more weight on capital injections. Or the TALF. Or something. But the administration could still change its mind. Because it’s only Friday, which means there are still 72 hours before Tim Geithner delivers the plan to the public.
WSJ: The Obama administration’s financial-rescue plan is shaping up to include capital injections with tougher terms than the first round and an expansion of an existing Federal Reserve lending facility that could potentially buy up toxic assets clogging the system, according to people familiar with the plans.
The discussions are still fluid and much could change. But efforts to create a so-called bad bank to purchase distressed assets and to insure other assets against future losses appear less central to the administration’s thinking. Still, some within the administration continue to push those efforts and they could wind up as part of the plan that will be detailed Monday by Treasury Secretary Timothy Geithner.
Nothing like being confident your leaders have a firm hand on the tiller. Some more details:
To deal with the toxic assets at the heart of the financial crisis, the administration is considering expanding the Fed’s consumer-lending facility, known as the Term Asset-Backed-Securities Loan Facility. The TALF was set up to spur the consumer-loan market by having the Fed lend up to $200 billion to investors who buy securities backed by car loans, credit card debt, student loans and small business debt. The Obama administration is discussing expanding the TALF to provide financing for other older assets, such as mortgage-backed securities.
Also under discussion is another round of capital injections that would carry stricter terms and likely be used by weaker banks in need of money instead of the healthy banks that were targeted in the first round.
Instead of buying preferred shares, as it did before, the government is discussing taking convertible preferred stakes that automatically convert into common shares in seven years. Such a move could help banks as they look for ways to bolster common equity. When a bank takes a loss, it has to subtract that amount from the value of its common equity. As losses mount, investors increasingly believe banks need to find ways to shore up this first line of defence on their balance sheets.
Dilution. That should save Bank of America’s stockholders.
Why does the Obama administration being so wishy washy here? Because they want to be different than Bush. But they have also discovered that Americans hate the idea of over-paying for crap assets as they would in the bad-bank plan. So that’s something to cheer about.