The Treasury Department plans to spend up to $100 billion of the next phase of the Troubled Asset Relief Program [TARP] to help ease tight credit for consumers and businesses, sources told FOX Business on Monday night.
Treasury would do this through an existing joint lending program with the Federal Reserve, as well spend up to $100 billion for new bank capital injections and at least $50 billion to modify mortgages for homeowners facing foreclosures, sources close to the process said.
Sources were reporting details of “TARP 2” provided to members of the House Financial Services Committee and the Senate Banking Committee on Monday night by Treasury officials. Treasury Secretary Timothy Geithner is scheduled to formally release the plan, which will have $350 billion in total spending authority, on Tuesday morning.
The sources close to the process said Treasury officials told Senators that the mortgage modification program could require as much as $100 billion, and a House staff member confirmed that at least $50 billion would be spent on this program. While Treasury will unveil broad goals of the foreclosure prevention program on Tuesday, the Obama administration will announce specific terms and details of that program within two weeks, sources said.
Within TARP 2, the Treasury plans to purchase up to a range of $250 billion to $500 billion in toxic bank assets under a “legacy asset program,” which Treasury officials told House members could grow to $1 trillion, the House source said. The program would be launched in partnership with the Fed and the Federal Deposit Insurance Corp., the source said, “to leverage the capacity of the public sector.”
Based on standard banking industry capital rules, in which healthy banks maintain $1 of capital for every $10 dollars they lend, the program would likely require at least $25 billion to $50 billion in initial capital from the Treasury to launch.
As previously reported, sources said Treasury officials are trying to discourage the use of the term “bad bank” to describe their plans to purchase toxic assets from financial institutions -- the House source said Treasury briefers did not use the term. But, regardless of labels, the Treasury’s TARP 2 plan would isolate banks' toxic assets, mainly through government guarantee programs, sources said. Assets could remain on banks’ balance sheets or sold off to new entities at discounted prices to reflect current, lower market values, to the government alone or in joint ventures with private investors.
To help increase lending to consumers and business, the Treasury would dedicate up to an additional $100 billion of TARP 2 funds to a liquidity facility it announced last year with the Fed, the Term Asset-Backed Securities Loan Facility, and expand the facility from increasing just consumer lending to also boost commercial real estate and residential mortgage lending, sources said.
Under the TALF, banks and investors, including hedge funds, can borrow from the Fed by pledging collateral in the form of highly rated asset-backed securities -- originally, securities backed by credit-card debt, auto loans, student loans and other consumer loans. Credit markets for such lending have been hurt by the credit crunch, as have residential and commercial mortgage lending.
In budgeting up to $100 billion in additional capital injections for banks, Treasury would receive stock in institutions. The Obama Administration has also vowed to impose tougher rules on executive compensation, dividends, stock buybacks and certain corporate expenses in TARP 2 capital investments than were imposed in the first round of TARP.
The Fed, FDIC and Treasury have previously joined forces to provide government guarantees against future losses on toxic assets for Citigroup (C) and Bank of America (BAC), and in other financial stabilization programs; in those programs, the bad assets remain on the banks’ balance sheets. Any new plans for such guarantees under TARP 2 were not clear Monday evening.
A spokesperson for the Treasury Department did not comment.
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