Sunday, November 09, 2008

Funny Money For All

The federal government is preparing to take tens of billions of dollars in ownership stakes in an array of companies outside the banking sector, dramatically widening the scope of the Treasury Department's rescue effort beyond the $250 billion set aside for traditional financial firms, government and industry officials said.

Treasury officials are finalizing the new program, which could ultimately involve hundreds of billions of the $700 billion rescue package, though the initiative is unlikely to be announced until the end of next week at the earliest.

Two industry sources familiar with the planning said the Treasury is holding off because it wants to make sure President-elect Barack Obama is on board and will not reverse the course once he takes office in January. But an administration official contested that explanation, saying the Treasury simply wants to give its initial bank plan a chance before injecting more money into the financial system.

Since the announcement of the program to inject capital into banks, a number of industries, including automakers, insurers and specialty lenders for small businesses have approached the Treasury with hat in hand. Some have been turned away because they are not banks and thus not eligible for capital.

The new initiative would make it easier for the Treasury to aid a wider variety of firms if their troubles put the wider financial system at risk, government and industry officials said. These companies would still have to be financial firms that fall under federal regulators.

Several companies, including GMAC, an auto financing company, and CapitalSource, a commercial lender in Bethesda, are seeking ways to restructure themselves as banks or thrifts, which entails submitting to much tighter federal regulation. If other firms follow suit, the trend would vastly expand government oversight into a variety of industries.

The Treasury is also making progress on an initiative that would provide relief to homeowners at risk of foreclosure. Several proposals are on the table, including one crafted by Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., who wants to spend about $40 billion to modify the mortgages for as many as 3 million homeowners. But several government and industry sources close to the matter said Treasury officials view Bair's plan as flawed and are seeking ways to revise it.

Designing these new programs is difficult because the Treasury will have to hand off the $700 billion rescue package, approved by Congress last month, to the new administration before officials have finished mapping out how to use the money.

Treasury officials said they have reserved space within its imposing building directly east of the White House for the Obama economic team to coordinate efforts but have not yet heard from his camp on who will staff the office. Obama has planned an emergency meeting of his senior economic team in Chicago today to discuss the global financial crisis.

Industry sources and a former senior Treasury official said the department deliberately slowed the decision-making process on new rescue programs two weeks ago to accommodate the interests of the incoming administration. The complexity of the issues and a tremendous volume of input and requests for money from all kinds of industries also have complicated matters.

"The last thing you want to do is start something and have the new guys unravel it in 60 days. It sends mixed messages to the markets," the former Treasury official said. "So I think the thinking was, 'Let's kick the can down the road to make sure we are on the right track.' "

A Treasury official said the department has been briefing Obama on the crisis since late July and explaining the administration's approach to the crisis. But his position on the crisis is only one factor among many being considered by the Treasury, the official said.

"Continuity is in the best interests of the markets and the economy," Treasury spokeswoman Michele Davis said. "But a change in an administration is likely to bring some changes, and we all recognize that."

Treasury also wants to give its initial $250 billion program a chance to work, government officials said. Those who engineered this strategy think it is far too early to say whether it has worked but say it has shown enough promise to continue expanding the effort.

The efforts have tentatively improved conditions in financial markets compared with the paralysis that was taking hold in the middle of last month. And while many on Capitol Hill have criticized decisions by some banks to use the federal money to take over weaker competitors, leaders of the Treasury and Federal Reserve see benefits to that activity because this has reduced uncertainty in the marketplace by resolving the fate of banks that otherwise would have failed.

But officials at the Treasury and the Fed face a challenge in deciding who to help outside the traditional banking sector. With banks, the determination is simpler for regulators because they are more familiar with the operations of these firms. Officials have less experience overseeing other kinds of companies.

The companies that have the best chance to receive government capital could be those that resemble banks -- in that they borrow money and then lend it to businesses or consumers -- even if these financial firms are not chartered as banks. Treasury officials are trying to evaluate which companies could become a bank or thrift holding company and be viable in the long run with government help, as opposed to those fated to fail.

Normally, the process of acquiring a charter as a bank or thrift holding company takes at least one month. But the Fed has shown a willingness to act much faster. Two months ago, it approved the conversion of investment banks Goldman Sachs and Morgan Stanley into bank holding companies in a matter of hours.

Toni Simonetti, a spokeswoman for GMAC, said her company has few options for raising money other than from the government and is now applying to become a bank holding company. The company's financial troubles mean it cannot lend to dealerships that need loans to buy vehicles for their lots or to people who want to buy cars.

"We've had such a difficult time getting access to funding," Simonetti said. "All of these financing tools are now at the government, but you have to be a bank holding company to have access to them. . . . We are definitely at the government's mercy." GMAC has been in close consultation with the Treasury and Fed about its plans to restructure, she said.

GMAC and other firms could face difficulties because of a long-standing rule that a commercial business cannot own more than 24.9 percent of a bank. General Motors owns a 49 percent stake in GMAC.

Moreover, to become a bank holding company, firms would be required to raise more capital. The Fed would prefer they raise at least some private money in addition to any injection from the Treasury. Yet the troubled markets make it hard for a financial company to raise private capital.

Some insurers, such as Prudential and MetLife, are organized as a bank or thrift and would be permitted to receive a capital injection from the government. Insurers that do not fit the definition, however, would have to restructure themselves to participate. Those who do not could be placed at a disadvantage.

The Hartford Financial Services Group, the large Connecticut-based insurer, is not a thrift or a bank, but a spokeswoman said it would consider participating in a federal capital injection program.

"We would evaluate participating, should it be available to us," Hartford spokeswoman Shannon LaPierre said.

Likewise, executives with insurer Lincoln Financial Services Group signaled they would consider restructuring as well. In an earnings call last week, president and chief executive Dennis R. Glass was asked whether he'd be reluctant to become a bank holding company to participate in the federal program.

"Based on what I know," he said, "the answer is we would do that."

Source - Washington Post


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