Plan to Buy Toxic Bank Assets Delayed Again

Plan to Buy Toxic Bank Assets Delayed Again

The Administration’s long-awaited plan to save America’s banks is being
delayed again, government sources tell Time. Fears of an AIG-like backlash
among potential private investors, and the difficulty of creating a model to
price toxic assets on the banks’ balance sheets, have both contributed to
the delay, the sources say.

The slip is embarrassing for Treasury officials who have been assuring the
media and the markets that the plan was coming, first in mid-February, and
as recently as March 14 when Treasury Secretary Tim Geithner told Bloomberg TV he would release details soon. A senior Treasury department official says
the plan isn’t slipping, but other government officials say it is and could
be unveiled anywhere from next week to early April.

Facing this latest delay, Administration officials are urging patience and
insist they are moving more programs on more fronts faster than anyone has
tried to do before. “People want a quick, clean, decisive resolution to this
stuff, they want us to just fix it and have it be over with,” says a senior
Administration official. “We are moving in a relatively short period of time
on a scale that I don’t think you’ve ever seen an Administration do.”

The plan is intended to relieve banks of their toxic assets — including such
securities as subprime mortgage bonds — through purchases by a public-private
investment fund, heavily backed by government money. But versions of the plan have faced challenges from the start. Last year, when he was head of the New York Federal Reserve, Geithner said the government might to try by
itself to restart sales in these assets using a “reverse auction” where sellers bid down an asset’s price to compete for buyers.

That plan went nowhere, and in mid-February Geithner announced that the
government would design a partnership between private investors and the feds
that would kick-start a trading market for the assets. But figuring out
what mix of incentives and restraints should be written into the program has
proved extremely tricky.

On the one hand, no one wants taxpayer money handed indiscriminately to Wall
Street investors with no hope of return. On the other, if the program doesn’t encourage buyers to participate not only will the program fail, the markets could suffer a mini-panic, just as they did when the plan was
unveiled with no details in mid-February.

Geithner has been burdened by thin staffing as he tries to get nominees to the Senate who can pass muster. In the meantime, he is relying on career staff and a handful of unconfirmed counselors, like Lee Sachs and Gene Sperling, both of whom served in the Clinton administration.

Further complicating the challenge, the uproar over AIG has scared potential
private investors from any involvement in a government-run program. “AIG
makes everything worse,” says the senior administration official. Private
investors fear that an angry Congress might place restrictions on pay
packages for anyone who participates, Treasury, Federal Reserve officials
and industry officials say.