The Obama administration is developing proposals to help rescue the banking system that could cost taxpayers much more than the $700billion bailout Congress already has approved.
Details are still being worked out. But the administration will likely propose spending hundreds of billions more to address the foreclosure crisis, guarantee against losses on some bank assets and expand liquidity programs, according to people with knowledge of the discussions.
Looming above these is a proposal to set up a federal bank – dubbed a “bad bank” – that would buy troubled assets clogging financial institutions' balance sheets. This would free the institutions to lend money and would entice wary investors back into the market, proponents say.
But the government will have to commit far more money than policymakers were discussing even a few weeks ago.
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“I think we're talking hundreds of billions of dollars,” said Brian Gardner, an analyst with the research firm Keefe, Bruyette & Woods. “I don't think there's anyone who doubts the administration will be going back to the Hill for more than the $350 billion” recently released from this fall's $700 billion bailout package.
The International Monetary Fund wrote in a report Wednesday that losses from banks in the U.S. and Europe already have topped $1 trillion and could reach $2.2 trillion.
At that rate, the banks will require “at least half a trillion dollars” to remain solvent, the report says.
Congressional Democrats have been seeking advice from economist Mark Zandi, who said he is pushing a three-point plan for banks that includes more capital infusions, guarantees against losses on bad assets and a “bad bank” to buy distressed assets.
Federal Deposit Insurance Corp. Chairman Sheila Bair has mentioned the “bad bank” proposal in a series of interviews as one option the government should consider.
By purchasing bad assets that banks can't sell now, the government would set prices for them. This could cost the banks dearly in writedowns. But it also could give investors clarity about the relative strength of the financial institutions. That, in turn, could encourage those on the sidelines to begin investing again.
“Buyers are going to say, ‘Wait a minute, these are valuable assets; we just don't know how to price them,'” said Travis Larson, a spokesman for the Securities Industry and Financial Markets Association. “Now, many of these toxic assets aren't toxic any more, because in fact, the market value has gone up as buyers re-enter the market.”
Bank stocks surged Wednesday on expectations about the proposed plan to purchase assets. Wells Fargo soared 31 percent, Citigroup 19 percent and Bank of America 13 percent.
The administration also is exploring using the bailout fund to guarantee assets still being held by banks much like was done in expanded support programs provided to Citigroup and Bank of America.