New US banking plan helps insolvent owners

The Treasury Secretary’s project wants to avoid a de facto nationalization of banks and provides between $ 50 billion and $ 100 billion for real estate borrowers at risk

Timothy Geithner, the Treasury Secretary of Barack Obama, does not intend to inject into the US banking system sums that would bring the state of nationalization. It should not create a “bad bank”, a public bad bank structure designed to collect devalued “rotten” securities that plague banks’ ability to boost credit. But the mechanisms to help banks overcome their two main difficulties – their debts and their urgent need for cash – are so difficult to put in place that their announcement, scheduled for Monday, has been postponed to Tuesday, February 10.

Another element played: a premature announcement of the bank bailout could have interfered in a wrong way on the vote of senators that should take place Monday on the economic recovery plan of more than 800 billion dollars (620 billion dollars). ‘euros) that Mr. Obama considers “urgent”. Debates in the Senate remain alive. Sunday, the president had increased pressure on elected officials.

During the weekend, rumors followed one another about the measures that Mr. Geithner is preparing. Of the $ 700 billion plan adopted by the Bush administration, says TARP, a half remains to be allocated. But the elected officials were worried by the report of a commission of the Congress, made public on January 6, according to which the price paid by the State for its acquisitions turns out 22% to 31% higher than the real value of the assets.

The traceability of funds given to banks is blurred. Elected officials call on the Treasury to “ensure transparency in the beneficiary selection process” and in the actual use of funds, before paying the second half of the TARP.

Mr. Geithner’s new plan should contain four components: new injections of funds, a mechanism to purge “toxic” bank assets, measures to boost access to credit and help for indebted owners. It should announce more draconian conditions in the allocations of capital. Of the 350 billion left to the state to distribute, 50 to 100 should be intended to help insolvent real estate borrowers to renegotiate their loans.

Instead of a public bad bank, he wants to create an organization that uses the private sector. The Federal Reserve (Fed, US central bank) would take a large part of the contribution of funds, by lending investors on very favorable terms with guarantees against their losses. This solution was used in March 2008, on what is now a tiny scale, when JP Morgan bought out the Bear Stearns investment bank. It would have the advantage of preventing the government from needing a congressional vote.

REINFORCED MONITORING

As for direct capital injections, rather than preferential shares of banks, the government would acquire bonds convertible into shares with a maturity of seven years. Finally, Fannie Mae and Freddie Mac, the two de facto nationalized credit refinancing agencies, are expected to introduce new lending rules to which banks would be subject. And the FDIC, the bank deposit control agency, would see its surveillance capabilities strengthened. It would be allowed to control non-bank financial institutions, such as hedge funds, and dismantle them if necessary.

It is possible that Geithner announces an increase in the TARP, to which the adviser of Mr. Obama, Paul Volcker, former president of the Fed, is favorable. According to various studies, the cost of cleaning up the financial sector would reach $ 2 trillion.

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