Is It Good Not To Be "Bad"?

While a formal announcement is still a day away, it appears the Obama Administration is backing away from the concept of a "bad bank" to take control of the bad assets of US banks. Instead, they will propose that price floors on assets would be set by the federal government as a means of inducing private investors to take control of the assets, manage them, and eventually sell them back into the marketplace.

In explaining the outlines of the proposal on Sunday, Lawrence Summers, the top White House economic adviser, indicated the administration had received a number of proposals from private equity firms, hedge funds, and insurance companies interested in asset management. He said that bringing private equity into the process would help limit the exposure of the taxpayer.

This approach—perhaps best described as a "mixed model"—puts the federal government in the guarantor position and would most likely involve federal oversight of the private firms' activities under the program. Some requirements might flow to the new asset managers as well. For example, a mandate or strong encouragement to restructure mortgage loans could well be a part of the deal for them.

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TARP Management RFP's

As implementation of the financial rescue package accelerates, Treasury Secretary Hank Paulson today outlined at a press conference steps underway to implement the Troubled Asset Relief Program (TARP). Among those steps is the appointment of Neel Kashkari, a 35-year-old aerospace engineer whose resume includes a Wharton MBA and investment banking for Goldman Sachs, to be the interim head of the new Office of Financial Stability. The process for selecting firms to manage assets and assist in administering the TARP is underway. While it is moving quickly, we anticipate there will be additional opportunities in the near future for asset management firms and other service providers to be involved.

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Pressure to Produce a Bipartisan Compromise

Leading negotiators from the House and Senate began a negotiating session at noon today with a goal to work as long as it takes to resolve the 15 issues remaining on the table. They are taking a break as we write this, with plans to return to their discussions this evening. Secretary Paulson is in the Capitol to assist the negotiators and ensure the Administration's views are being taken into account. Momentum continues to build towards the announcement of a deal by Sunday afternoon. Leaders of the House and Senate hope to have votes on Monday, but the complexities of drafting the legislation may require that votes be pushed off until after Rosh Hashanah which ends on Tuesday at sundown.

As this afternoon's negotiating session began Sens. Judd Gregg (R-NH) and Mitch McConnell (R-KY) both said the Senators and Representatives meeting today would stay in the room until a deal was reached. While that may be over-optimistic, it is indicative of the fact that these leaders are feeling pressure to get something accomplished.

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Momentum Building for Financial Rescue

Momentum continues to build for enactment of the $700 billion Administration plan to buy troubled assets from financial institutions. As an indicator of the increasingly upbeat mood around the package, the Dow Jones Industrial Average increased by over 200 points for the day.

As we write this, President Bush is meeting with Sens. McCain and Obama and Congressional leaders to discuss how to advance the plan. While this meeting is viewed by many as a sideshow, a forceful statement by the sitting president and the two men seeking to replace him will add to the overall sense that action on Capitol Hill is soon possible.

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Treasury Negotiating for a Solution

Congress and the Administration have made significant progress today in refining the proposal released Saturday by Treasury Secretary Hank Paulson for a $700 billion purchase by the government of troubled financial assets. Prospects remain strong for Congress and the Administration to adopt a plan by the end of the week.

Between the release of the plan on Saturday and the opening of the markets today, Paulson made two important changes to his original plan. The first change was to broaden the class of assets eligible for purchase to include non-mortgage assets as deemed necessary. The second change was to allow foreign institutions with a significant US presence to participate in the asset purchase program.

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Treasury Seeks to Purchase Troubled Assets

The Treasury Department this past weekend submitted legislation to the Congress requesting authority to purchase troubled assets from financial institutions in order to promote market stability, and help protect American families and the US economy. This program is intended to fundamentally and comprehensively address the root cause of our financial system's stresses by removing distressed assets from the financial system.

The following description reflects Treasury's proposal as of Saturday afternoon.

Scale and Timing of Asset Purchases. Treasury will have authority to issue up to $700 billion of Treasury securities to finance the purchase of troubled assets. The purchases are intended to be residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans. The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets. The timing and scale of any purchases will be at the discretion of Treasury and its agents, subject to this total cap. The price of assets purchases will be established through market mechanisms where possible, such as reverse auctions. The dollar cap will be measured by the purchase price of the assets. The authority to purchase expires two years from date of enactment.

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