US Bail-Out Plan

US faces one of biggest budget crunches in world – IMF

US faces one of biggest budget crunches in world – IMF

By Edmund Conway Business Last updated: May 14th, 2010
98 Comments Comment on this article

Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating.

Read the details here:
http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-faces-one-of-biggest-budget-crunches-in-western-world-imf/


So does all of this mean the US is Greece? The answer, you might be surprised to hear, is no. Now, it is true that the US has some similar issues to Greece – the high debt, the need to roll over quite a lot of debt each year, the rising healthcare costs and so on. But it has two secret (or not so secret) weapons.

• The first is that unlike Greece it is not trapped in a monetary union. The US, like Britain and Japan, can independently control its monetary policy; it can devalue its currency. These are hardly solutions in and of themselves, but they do help make the adjustment a lot easier and more gradual. 
• Second, the US has growth. It remains one of, if not the, world’s most dynamic economies. It is growing at a snappy pace this year (in comparison to other countries). And a few percentage points of GDP make an immense difference, since they make those debts much easier to repay.

Finally, some might be tempted at this point to cite the fact that the US has the world’s reserve currency in the dollar as another bonus. I am less sure. There is no doubt that this has made the US a safe haven destination (people buy US bonds when freaked out about more or less anything), and has meant that America has been able to keep borrowing at low levels throughout the crisis. However, the flip side of this is that because it has yet to feel the market strain, the US also has yet to face up properly to the public finance disaster that could befall it if it does not do anything about the problem. America is not Greece, but if it does not start making efforts to cut the deficit within a few years, it will head in that direction. The upshot wouldn’t be an IMF bail-out, but a collapse in the dollar and possible hyperinflation in the US, but it would be horrific all the same. America has time, but not forever.

Obama tells carmakers to shape up or face bankruptcy

March 31, 2009

Investors get the jitters as Obama tells carmakers to shape up or face bankruptcy



Christine Seib in New York


President Obama's warning yesterday that he would not hesitate to put General Motors (GM) and Chrysler into bankruptcy slashed the price of the American carmakers' debt and pushed insurance against its default higher.

GM bonds maturing in 2033 and paying 8.375 per cent dropped 2.75 cents to 16 cents in the dollar.

Phoenix Partners Group said that buyers of a five-year credit default swap on GM debt would pay 80 per cent of the sum insured up front, plus 500 basis points a year, up from 77 per cent on Friday.

Term loans to Chrysler's automotive business were trading lower. Even Ford, which has not asked the US Government for a bailout, saw its debt drop slightly.

The President has given GM 60 days and Chrysler only 30 days to slash debt and hit other targets or face the bankruptcy courts. Even after talks lasting months, GM and, to a lesser extent, Chrysler had previously failed to convince their lenders to accept a smaller repayment than they are due. However, despite Mr Obama's threats, experts do not expect bondholders to roll over. Some may prefer to take their chances in the bankruptcy courts rather than accept the existing offer from the car companies.

Doug Harvey, partner in the automotive division at AT Kearney, the consultancy, said: “Bondholders traditionally are gamblers and aren't afraid to call a bluff.”

Under the terms announced by the White House yesterday, GM has 60 days to negotiate with its bondholders to cut its $28 billion unsecured debt by two thirds. The company has a relatively small amount of secured debt. The carmaker wants its unsecured bondholders to accept as much as 90 per cent of the equity in the reorganised company, plus some cash and new unsecured notes. The bondholders want the Government to guarantee this new debt.

It is not clear how much of the value of bondholders' investments is wiped out under the terms suggested by GM, but Standard & Poor's, the ratings agency, describes the offer as a “distressed exchange”, indicating that the value of the debt was now substantially below par.

After the Government's announcement, a bond analyst said: “Bondholders as a group will now need to decide whether they accept a distressed exchange outside the bankruptcy court or pursue remedies in court.”

If GM was to be put into Chapter 11, bondholders could argue that they should be allowed control of the company, be repaid via the sale of some assets or even the sale of the whole company.

This may result in a payout not substantially less than is currently on offer, but takes the control from the bondholders and puts it into the hands of a judge - a risky strategy.

Mr Obama has made clear that any bankruptcy proceedings will be closely overseen by the Government. This does not bode well for bondholders, who have already been described by Steve Rattner, the President's adviser on the car industry, as less constructive than he would like.

Analysts at Credit Suisse said that the Government may use the bankruptcy proceedings to put itself above unsecured lenders in any future payout, in order to protect taxpayers' funding that it supplies to GM.

Fritz Henderson, GM's new chief executive, indicated that President Obama's support for GM made it more likely the company would file for bankruptcy. "Whether out of court or in court, either way, they'll be there to support us," he said.

A statement from a committee of GM's bondholders said that they would prefer that the carmaker did not go into Chapter 11.

"Bondholders did not cause GM’s problems ... but are more than willing to work towards a comprehensive, sustainable solution in which GM emerges a leaner, more competitive entity," the statement said.

http://business.timesonline.co.uk/tol/business/industry_sectors/engineering/article6005600.ece

Geithner rescue package 'robbery of the American people'

Geithner rescue package 'robbery of the American people'
The US government plan to free beleaguered banks of up to $1 trillion (£690bn) of toxic assets will expose American taxpayers to too much risk, leading economist Joseph Stiglitz has cautioned.

By James Quinn, Wall Street Correspondent
Last Updated: 11:45AM GMT 25 Mar 2009

Joseph Stiglitz said Geithner's plan amounted to 'robbery of the American people'

The Nobel Prize-winning economist, speaking a day after the Dow Jones Industrial Average rose by almost 7pc in support of the novel public-private partnership (PPIP), said that the plan is "very flawed" and "amounts to robbery of the American people."

Professor Stiglitz on Tuesday led a list of well-known economists and high-profile industry figures who have said Treasury Secretary Tim Geithner's toxic asset plan may not be as successful as it first seems.


The plan involves ensuring up to $100bn of government funding is matched by private investors, with the monies combined and leveraged up, in some cases to by as much as 20:1, with the help of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), to buy pools of unwanted assets.

Professor Stiglitz, speaking at a conference in Hong Kong, said that the US government is essentially using the taxpayer to guarantee the downside risks, namely that these assets will fall further in value, while the upside risks, in terms of future profits, are being handed to private investors such as insurance companies, bond investors and private equity funds.

"Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."

His comments echo those of fellow Nobel Prize winner Paul Krugman, who said on Monday that the plan is almost certain to fail, something which fills him "with a sense of despair."

Others to criticise the plan include former Securities and Exchange Commission chairman Arthur Levitt, and Bill Gross, of bond manager PIMCO, who has said he does not believe the plan will be enough to solve the banking crisis.

It is understood that the PPIP was only finalised after Treasury officials, led by Mr Geithner, spoke to a number of senior bankers on Wall Street, including JP Morgan Chase chairman Jamie Dimon, in the hope of getting a plan that was workable for the market, following the dismissal of Mr Geithner's earlier attempt to solve the financial crisis.

As a result, a number of major banks and bond houses are understood to have already agreed to sign up to the programme, with PIMCO and BlackRock among two investors to have raised their hands.

Others remain less convinced.

http://www.telegraph.co.uk/finance/financetopics/recession/5045421/Geithner-rescue-package-robbery-of-the-American-people.html

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U.S. to Help Investors Buy Bank Assets

U.S. to Help Investors Buy Bank Assets
Markets Soar in Response to Public-Private Plan, Which Aims to Shore Up Lenders' Books

By Neil Irwin and David Cho
Washington Post Staff Writers
Tuesday, March 24, 2009; A01



Financial markets roared ahead yesterday as investors reacted with near-euphoria to the Obama administration's new trillion-dollar plan to stabilize banks by relieving them of their troubled assets and risky loans.

But even as markets exulted, conflicting interests among participants in the program -- banks, investors and taxpayers -- were emerging, leaving in doubt the fate of a program meant to revive bank lending and in turn reinvigorate the overall economy.

Some banks are resisting government pressure to sell assets at prices they believe to be too low. And despite the risk of an outcry from Congress, the Treasury this weekend made the program more attractive to private investors, according to industry and some government officials. Treasury officials said the last-minute changes were not intended to sweeten the deal.

In the short run, the rollout of the plan gave a much-needed boost to the administration and beleaguered Treasury Secretary Timothy F. Geithner, as officials on Wall Street and Washington in general spoke favorably of the plan. The Standard & Poor's 500-stock index rose 7.1 percent in the best day for the stock market in five months.

"The policymakers definitely have the right ideas in their head right now, but whether they can execute it I don't know," said Daniel Alpert, managing director of Westwood Capital, a boutique investment bank.

The Obama administration is now preparing its next move, planning this week to send legislation to Congress granting the government new powers to seize troubled non-bank financial companies whose collapse would threaten the broader economy, according to three sources familiar with the matter. Administration officials said the proposed authority, for instance, would have allowed them to seize American International Group last fall and wind down its operations at less cost to taxpayers. Geithner is expected argue for the new powers at a hearing on Capitol Hill today.

The new Public-Private Investment Program, which Geithner announced yesterday, includes programs to buy up real-estate-related loans and securities backed by those loans. It will combine $75 billion to $100 billion in financial rescue funds already approved by Congress with investments from private investors, loan guarantees by the Federal Deposit Insurance Corp., and loans from the Federal Reserve to buy up to $1 trillion in real-estate-related assets.

The idea is that banks are unwilling to lend money in part because they fear further losses on past loans now stuck on their books. Government officials said they hope that introducing new buyers will help set a floor for asset prices and stabilize the broader financial system by removing troubled assets from financial firms.

But the initiative leaves the Treasury's financial rescue fund nearly tapped out, and with a hostile environment in Congress, administration officials are worried that they might be unable to get more money.

If the Treasury uses the full $100 billion, it would leave only $12 billion uncommitted from the $700 billion financial rescue package that Congress approved in early October, according to tabulations by the Committee for a Responsible Federal Budget. In turn, that would leave Geithner with few options to provide emergency capital if a major financial firm finds itself on the verge of failure or the "stress tests" now being conducted on large banks reveal an urgent need.

Geithner's credibility with Congress was at a low ebb after the outcry last week over bonuses paid to executives of American International Group. Congressional leaders still say it would be difficult to pass a law giving the Treasury any further funds for financial rescues.

Yet without those funds, the Treasury was forced to stretch the dollars it already has, crafting a plan that is complex and probably more costly to taxpayers over the long term than if Congress provided help.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, suggested that a successful rollout of the public-private investment fund could change the tenor on Capitol Hill. "What they're trying to do now is avoid a showdown" between the administration and Congress over more bailout money. "If these things are successful, then I think there would be some more funding down the road."

Geithner and his colleagues at the Treasury Department have been trying to design a program that achieves several objectives: giving private investors plenty of incentive to buy the distressed assets, getting banks to willingly sell these assets and protecting taxpayers from unreasonable risk.

Treasury officials made changes to the plan in recent days in a way that makes it more favorable to private investors, according to government and industry sources. For instance, on Saturday, the draft plan called for the Treasury to put in four times as much equity as private investors, which would give taxpayers a greater windfall if the banking system recovers and the investments become profitable. But Treasury officials surrendered some of those potential gains after listening to the concerns of hedge funds and private-equity funds on Sunday, industry officials said.

The Treasury increased private investors' share of potential profits from 20 percent to 50 percent. A senior official at the department said it was not because the Treasury wanted to make the deal better for the investors but because it wanted to send a consistent message that the government would take the same stake as the private sector across all rescue programs. A smaller Treasury stake also means less risk for taxpayers, the official said.

The response from major investors yesterday was strongly supportive. Bill Gross, co-chief investment officer of Pimco, the nation's largest bond investor, said his firm is eager to participate and that the program is a "win-win-win" policy that "should be welcomed enthusiastically."

Some analysts and senior government officials fear that taxpayers may be giving up too much -- including potential double-digit-percentage returns -- to the investors.

"We are giving the private side a certain package that could well be much more than is necessary to get them, in which case the taxpayers are leaving a lot of money on the table," said Lucian Bebchuk, a Harvard Law School professor who was an early advocate of the government's approach.

"If this is profitable, and I think it will be very profitable, you're giving more profit to private investors," added FDIC Chairman Sheila C. Bair.

Another challenge comes from the banks. Many bankers said they believe their loans and securities are worth far more than current market prices would suggest. They say privately that current prices reflect an overly negative prognosis for the economy. Banks are also worried about the losses they would incur if forced to accept short-term prices for loans that are being held until maturity.

Bair said she cannot guarantee that banks will participate in the program, even though regulators may put pressure on them to do so.

Geithner needed the announcement to go well after facing one of the worst weeks in his young tenure as Treasury secretary, largely because of the furor over the AIG bonuses. Treasury officials had considered delaying the announcement of the program until that controversy blew over, sources familiar with the matter said. But they ultimately decided that the toxic-asset program was too important to delay, the sources said.

Then administration officials tried to lower expectations when talking to the media. The announcement its was simplified and pared back, sources said. Originally, for instance, some staffers had urged that the department also provide a public update on the stress test being conducted on banks. This was dropped from the announcement.

Republican members of Congress expressed some skepticism of the bank bailout plan yesterday, though Democratic leaders were more supportive.

Staff writer Binyamin Appelbaum contributed to this report.



http://www.washingtonpost.com/wp-dyn/content/article/2009/03/23/AR2009032300572.html

Financial Policy Despair - PAUL KRUGMAN

Op-Ed Columnist
Financial Policy Despair

PAUL KRUGMAN
Published: March 22, 2009

Over the weekend The Times and other newspapers reported leaked details about the Obama administration’s bank rescue plan, which is to be officially released this week. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

This is more than disappointing. In fact, it fills me with a sense of despair.

After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Let’s talk for a moment about the economics of the situation.

Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.

As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now.

But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.

But the real problem with this plan is that it won’t work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus — for that is what the Geithner plan amounts to — will change that fact.

You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost.

Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails — as it almost surely will — it’s unlikely that he’ll be able to persuade Congress to come up with more funds to do what he should have done in the first place.

All is not lost: the public wants Mr. Obama to succeed, which means that he can still rescue his bank rescue plan. But time is running out.

http://www.nytimes.com/2009/03/23/opinion/23krugman.html?em

When the Economy Really Did ‘Fall Off a Cliff’

Op-Ed Contributor
When the Economy Really Did ‘Fall Off a Cliff’

By JEAN STROUSE
Published: March 22, 2009
IN what may come to be the definitive line about our current economic crisis, Warren Buffett said on the CNBC program “Squawk Box” this month that the United States economy has “fallen off a cliff.”

The most trusted investor in history went on the air to talk, with characteristic candor and humor, about the horrendous truth we pretty much know, possibly in an effort to calm things down and point toward some answers we don’t yet know. He proceeded to give his views on what went wrong (“everybody thought house prices could go nothing but up ... so you had $11 trillion of residential mortgage debt built on this theory ”), on people’s paralyzing fear and confusion (“We are in a very, very vicious negative feedback cycle .... I don’t want this to be the last line of the movie”), and on the absolute necessity of fixing the banks and taking clear, decisive action.

A look back at the handling of another financial crisis a full century ago underlines the point about decisive action. You just don’t want to take the wrong decisive action. Markets today are immeasurably more complex, global, fast-moving and regulated (a lot of good that did) than they were a hundred years ago, but the need for strong leadership has not changed.

In early 1906, the banker Jacob Schiff told a group of colleagues that if the United States did not modernize its banking and currency systems, its economy would, in effect, fall off a cliff — that the country would “have such a panic ... as will make all previous panics look like child’s play.”

Yet the country failed to reform its financial institutions, and conditions deteriorated steadily over the next 20 months. There was a worldwide credit shortage. The American stock market crashed twice. The young Dow Jones industrial average lost half of its value.

In October 1907, when a panic started among trust companies in New York and terrified depositors lined up to get their money out, Schiff’s dire prediction seemed about to come true. The United States had no Federal Reserve, the Treasury secretary did not have much political authority, and the president, Theodore Roosevelt, was off shooting game in Louisiana.

J. Pierpont Morgan, a 70-year-old private banker, quietly took charge of the situation.

In the absence of a central bank, Morgan had for decades been acting as the country’s unofficial lender of last resort, gathering reserves and supplying capital to the markets in periods of crisis. For two harrowing weeks in 1907, with the whole world watching, he operated like a general, deploying three young lieutenants to do leg work and supply him with information, and bringing two other leading bankers, James Stillman of National City Bank and George Baker of the First National Bank, into a senior “trio” to make executive decisions. (First National and National City eventually combined to form what is now Citigroup — are the shades of Baker and Stillman writhing over what has become of their descendant institution?)

The Morgan teams ran “stress tests” on the unregulated trust companies, figuring out which were impossibly overleveraged and should be allowed to fail, and which were basically sound but crippled by the panic. Once they had determined that a trust was essentially healthy, the bankers supplied it with cash, matching their loans dollar-for-dollar with the trust’s collateral assets.

When the New York Stock Exchange nearly closed early one day in October 1907 because financial institutions calling in loans were choking off the market’s money supply, Morgan summoned the presidents of New York’s major commercial banks to his office and came up with $24 million to lend to the exchange. Next, New York City ran out of cash to meet its payroll and interest obligations; Morgan and company conjured up a $30 million loan and prevented default.

At the end of Week 1, President Roosevelt sent a letter to the press congratulating the “substantial businessmen who in this crisis have acted with such wisdom and public spirit.” Shipments of gold were on the way from London to New York, and confidence had returned to the French Bourse, “owing,” reported one paper, “to the belief that the strong men in American finance would succeed in their efforts to check the spirit of the panic.” During a panic, confidence is almost as good as gold.

At the end of Week 2, Morgan called 50 presidents of trust companies to his private library on East 36th Street, locked the doors, and did not let them out until they had signed on to a final $25 million loan. The scholar of Renaissance art Bernard Berenson told his patron Isabella Stewart Gardner that “Morgan should be represented as buttressing up the tottering fabric of finance the way Giotto painted St. Francis holding up the falling church with his shoulder.”

Though Morgan had a large sense of public duty, he had not shouldered the falling church out of pure altruism. His self-interest operated on a national scale. His clients — many of them Europeans who had invested for decades in the emerging American economy through the House of Morgan — had billions of dollars committed in the United States. In watching over their long-term interests, trying to control the excesses of the business cycle and maintain the value of the dollar, Morgan had come to serve as guardian of American credit in international markets.

His power in 1907 derived not from the size of his own fortune but from the trust placed in him by investors, other bankers and international statesman. After Morgan died in 1913, the newspapers reported his net worth as about $80 million — roughly $1.7 billion in today’s dollars. John D. Rockefeller, already worth a billion in 1913 dollars, is said to have read the figure, shaken his head, and remarked, “And to think he wasn’t even a rich man.”

Trust in Morgan was by no means universal. In 1907, some of his critics charged that he had started the panic in order to scoop up assets at fire-sale prices and line his own pockets. In fact, the Morgan banks lost $21 million that year.

The difficulty today of assigning dollar values to “toxic” assets makes Morgan’s job look easy. Yet though the amount of money required for the 1907 bailouts is pocket change compared to the current trillions, at the time, the troubles and the numbers seemed enormous.

No single figure, much less a private banker, could wield the kind of power in today’s gargantuan collapsing markets that Morgan had a hundred years ago. And so far, not even the combined official powers of the Fed and Treasury have been able to stop the cascading disasters. Paul Volcker, the former Federal Reserve chairman, said recently that he couldn’t remember a time “maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.”

Perhaps new economic leadership will emerge during this crisis, under our gifted, charismatic president. It seems likely to consist of people who have the kind of experience, judgment and authority Morgan had — possibly a new “trio” made up of the current Fed chairman, Ben Bernanke; Paul Volcker; and Warren Buffett.

Only Mr. Bernanke is formally in a position to exercise that high authority now, which he is doing — he announced last week that the Fed would inject an extra $1 trillion into the financial system. Mr. Volcker, chairman of the White House Economic Recovery Advisory Board, could easily be promoted to a more dominant role. Mr. Buffett has already stepped up in public, praising the steps the Fed took last fall to insure money markets and commercial paper as “vital in keeping the place going” (if the Fed hadn’t acted, Mr. Buffett told his CNBC interviewer, “we’d be meeting at McDonald’s this morning”).

Moreover, Mr. Buffett said he could “guarantee” that in five years or so “our great economic machine” will be running a lot faster than it is now, with the government playing an enormous role in how quickly it recovers. Last fall he declared that we had just been through an “economic Pearl Harbor.” Last week he said that in order to fight this economic war the country has to unite behind President Obama, the government has to deliver “very, very” clear messages and we all have to focus on three jobs:

Job 1: win the economic war.

Job 2: win the economic war.

Job 3: win the economic war.

Just what Morgan would have said.


Jean Strouse is the author of “Morgan: American Financier” and the director of the Cullman Center for Scholars and Writers at The New York Public Library.



http://www.nytimes.com/2009/03/23/opinion/23strouse.html?em

U.S. Lays Out Plan to Buy Up to $1 Trillion in Risky Assets

U.S. Lays Out Plan to Buy Up to $1 Trillion in Risky Assets

Todd Heisler/The New York Times
President Obama met with his economic team, including the Treasury secretary, Timothy F. Geithner, at the White House on Monday.

By BRIAN KNOWLTON and EDMUND L. ANDREWS
Published: March 23, 2009

WASHINGTON — The Obama administration formally presented the latest step in its financial rescue package on Monday, an attempt to draw private investors into partnership with a new federal entity that could eventually buy up to $1 trillion in troubled assets that are weighing down banks and clogging up the credit markets.

Multimedia
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Tracking the $700 Billion Bailout
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Geithner Pushes Bank Rescue Plan, Part 1
Geithner Pushes Bank Rescue Plan, Part 2

Related
The Lede: A Boom in the Financial Metaphor Market (March 23, 2009)
Transcript: Treasury Timothy Geithner’s Press Briefing (March 23, 2009)

The Dow Jones industrial average was up sharply in afternoon trading on Monday, gaining more than 270 points. When the Treasury secretary, Timothy F. Geithner, spoke on Feb. 10 of a bank rescue plan without offering much detail, investors took that as a worrying sign and the Dow fell sharply, losing 380 points.

The Treasury secretary did not deny the uncertainties inherent in the new program on Monday but defended it as a practical approach. “There is no doubt the government is taking a risk,” Mr. Geithner said, “the only question is how best to do it.”

President Obama said later that he and his economic advisers were “very confident” that the program outlined by Mr. Geithner would start to unclog the credit markets.

“It’s not going to happen overnight,” the president said after meeting with his economic team. “There’s still great fragility in the financial systems. But we think that we are moving in the right direction.”

The president also reiterated his pledge “to design the regulatory authorities that are necessary to prevent this kind of systemic crisis from happening again.”
The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well. At least two Republican lawmakers have called for his resignation. And on Sunday, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, told Fox News that “if he keeps going down this road, I think that he won’t last long.”

Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.
At the core of the financing package will be $75 billion to $100 billion in capital from the existing financial bailout known as TARP, the Troubled Assets Relief Program, along with the share provided by private investors, which the government hopes will come to 5 percent or more. By leveraging this program through the Federal Deposit Insurance Corporation and the Federal Reserve, huge amounts of bad loans can be acquired.

The private investors would be subsidized but could stand to lose their investments, while the taxpayers could share in prospective profits as the assets are eventually sold, the Treasury said. The administration said that it expected participation from pension funds, insurance companies and other long-term investors.

The plan calls for the government to put up most of the money for buying up troubled assets, and it would give private investors a clearly advantageous deal. In one program, the Treasury would match, one for one, every dollar of equity that private investors invest of their own money in each “Public Private Investment Fund.”

On top of that, the F.D.I.C. — tapping its own credit lines with the Treasury — will lend six dollars for each dollar invested by the Treasury and private investors. If the mortgage pool turns bad and runs big losses, the private investors will be able to walk away from their F.D.I.C. loans and leave the government holding the soured mortgages and the bulk of the losses.

The Treasury Department offered this example to illustrate how the program would work: A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. The F.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, using funds from the $700 billion bailout program; the private investor contributes the remaining $6.

An attractive feature of the program is that it will allow the marketplace to establish values for the assets — based, of course, on the auction mechanism that will signal what someone is willing to pay for them — and thus might ease the virtual paralysis that has surrounded those assets up to now.
For a relatively small equity exposure, the private investor thus stands to make a considerable return if prices recover. The government will make a gain as well. In the worst case, the bulk of the risk would fall on the government. The presumption, of course, is that the auction will lead to realistic purchase prices.

One institutional investor said he was surprised that the government was lending so much of the money, saying that private investors have been willing to buy up pools of mortgage-backed securities with less “leverage” or outside borrowing than the Treasury proposed on Monday.
The true magnitude of the toxic-asset purchase program could amount to well over $1 trillion. Buried in Mr. Geithner’s announcement was the detail that the Treasury would sharply revise and expand its joint venture with the Federal Reserve, known as the Term Asset-backed Secure Lending Facility, which was originally created to finance consumer lending and some forms of business lending.

Starting soon, that program will be expanded to finance investors who want to buy existing mortgages and mortgage-backed securities, including commercial real estate mortgages. By allowing the so-called TALF program to buy up older assets, as well as new loans, the Treasury and Fed will be putting nearly an additional $1 trillion on the line — on top of all the money being provided through the F.D.I.C. program and the Treasury partnership programs announced on Monday.

The department defined three basic principles underlying the overall program.

• First, by combining government financing, involving the F.D.I.C. and the Federal Reserve, with private sector investment, “substantial purchasing power will be created, making the most of taxpayer resources,” the fact sheet said.
  
• Second, private investors will share both in the risk and in the potential profits, the Treasury Department said, “with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.”
  
• The third principle is the use of competitive auctions to help set appropriate prices for the assets. “To reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased,” the department said.

By emphasizing that private investors will share in the risk, the Treasury Department seemed to be seeking to reassure ordinary taxpayers that they will not bear the entire downside burden of yet another $1 trillion program.

At the same time, administration officials strove over the weekend to reassure potential investors that they would not be subjected to the sort of pressures, criticism and public outrage that followed reports of multimillion-dollar bonuses to executives of the American International Group.

The Treasury Department defended its approach as a compromise that would avoid the dangers both of being too gradual an approach and of burdening taxpayers with the entire risk.

“Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience,” the department said. “But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases — along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.”

The plan relies on private investors to team with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk.

But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations.

Mr. Geithner made it clear on Monday that no limits on executive compensation would be imposed on companies that invest — unless the companies are already subject to such limitations as recipients of TARP money — because the government does not want to discourage investor participation.

Eric Dash and Rachel L. Swarns contributed reporting from Washington, and Andrew Ross Sorkin from New York.

http://www.nytimes.com/2009/03/24/business/economy/24bailout.html?_r=1&hp

US calls on Sweden's "Mr Fix It" Bo Lundgren

US calls on Sweden's "Mr Fix It" Bo Lundgren
The Swedish financial chief known as "Mr Fix It" has been summoned to Washington to advise on how Sweden's model might avert a global banking meltdown.

By Henry Samuel in Stockholm
Last Updated: 11:11AM GMT 20 Mar 2009

US turns to "Mr Fix It" Bo Lundgren, the steely-eyed head of Sweden's National Debt office, played a leading role in averting the collapse of the Swedish banking sector when a property bubble burst in the early 1990s.

Sitting in his office in downtown Stockholm before his trip to Washington, Mr Lundgren chuckled at the Wall Street joke that "Swedish models used to only attract attention if they were blonde and leggy".

Now, US President Barack Obama cites Sweden as a possible model of how best to tackle failing banks. Mr Lundgren, who was fiscal and financial affairs minister at the time of the last crisis, yesterday outlined the Swedish solution to the Congressional Oversight Panel, which supervises the US administration's troubled asset relief programme.

"I am a market liberal. I was even called the nearest Sweden had every come to having a party one could call libertarian," said Mr Lundgren, the former head of the Moderate Party with links to the Conservatives.

This did not stop him nationalising two failing major banks in 1992: the already majority state-owned Nordbanken, and the privately owned Gota bank.

"In the case of a crisis, the state needs to be strong," he said. "If it decides to act, it should become an owner."

After initial hesitation, when the Swedes chose to act they soon reached a broad political consensus.

The first, and in his eyes crucial step Mr Lundgren took was to restore liquidity by issuing a so-called "blanket guarantee" for all non-equity claims on Swedish banks.

This was vital to restore confidence, he said, and is something that has not been done in the US and UK.

It was also crucial not to put a figure on the guarantee, according to Stefan Ingves, the governor of the Riksbank, Sweden's central bank. Mr Ingves was a finance ministry official in the early 1990s and led the Bank Support Authority, created to resolve the crisis.

"If you pick a very low figure, people will say: 'That's not credible, we think the problem's bigger than that.' If you pick a very high figure, then people say: 'Oh gosh, is it that big a problem?'," he said.

The government did not extend its credit guarantee to shareholders of the nationalised banks, who were wiped out.

In the UK, the Royal Bank of Scotland has refused to go this far, but the Swedes insist this acts as a wake-up call to shareholders of troubled but still solvent banks to shape up or ship out. This decision spurred two private banks to raise private capital.

A "stress test" was worked out to determine how bad the problems were in each bank for the coming three years.

Banks were then ranked as healthy or as candidates for nationalisation, and those in between were told to clean up their act or face being taken over by the state.

Next, the toxic assets of the nationalised banks were ring-fenced into two separate bad banks and run by independent asset-management companies. The good assets were placed in a single, merged bank.

As central banks and supervisors "don't do corporate restructuring", the Swedish authorities decided to bring in investment bankers from the private sector to run the corporate finance side of the bad banks' assets. "Huge numbers" of bankers and auditors were flown in from London to do the "daily running of these businesses," said Mr Ingves.

Private banks were also urged to place their non-performing loans in separate bad banks. However, unlike what has been mooted in the US, there was never any question of the authorities buying bad assets from banks that remained in any way privatised. "We refused to do that because we could never agree on the price. If you pay too much it's a giveaway to the shareholders. If you pay very little then the transaction simply won't happen," said Mr Ingves.

Despite calling it a "political value judgment", it is clear he disapproves of countries such as Britain and the US who have committed huge sums to insure bad assets of private or part-private banks.

Once split, the two Swedish bad banks managed to liquidate their assets by 1997 and the state recouped at least half the funds it had made available.

While the process worked back then, the two Swedes recognised that the 1990s crisis, essentially home-grown and involving half a dozen national banks, was very different from the current global meltdown, involving far more banks and complex "packaged and repackaged" assets. Still, the solution remains the same, said Mr Ingves, even if far more co-ordination is today required.

"Clearly, one of the lessons that comes out of all this is that in Europe, the financial integration between countries ran way ahead of the EU's willingness to have a regulatory framework following at the same pace," said Mr Ingves.

The Swedes also expressed concern that other countries' handling of this crisis was still too piecemeal.

"In the US, certainly early on, there was no consistent policy over capital injection and bad assets. Now it's better but there are still too many loose ends," he said.

"To restore confidence you have to show exactly how big the problems are and how you are going to take care of that."

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5019186/US-calls-on-Mr-Fix-It.html

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Why It's Taking So Long To Fix the Economy

Why It's Taking So Long To Fix the Economy
February 27, 2009 02:49 PM ET Rick Newman Permanent Link Print

Nobody wants to listen to Ben Bernanke - even though the Federal Reserve Chairman has been a pretty effective soothsayer.
Last fall, he famously predicted catastrophe if the government didn’t step in to help stabilize panicky financial markets. That was on the mark: Even with more than $2 trillion worth of government intervention since then, the economy is in tatters.
Bernanke has said we’re in a “severe” recession, which has now been borne out by the biggest decline in GDP since the punishing 1982 downturn. And now, he says that a recovery depends on whether a series of unproven government moves works or not. If we're lucky, things might start to get better by 2010.
[See how to tell when the economy’s getting better.]
We don’t want to believe it. That’s too long. We don’t want to wait till next year. We want things to get better NOW.
Stock market investors are the worst offenders. They’re continually looking for signs that a quick fix is right around the corner. Then they grow despondent when it doesn’t materialize, madly selling and sending the markets into yet another nosedive.
Homeowners are guilty, too. Sellers in many neighborhoods are still clinging to unrealistically high prices, sure that a housing rebound is coming soon. Workers who still have jobs refuse to prepare for a rainy day, hoping they won’t be among the 1 or 2 million Americans still likely to lose their jobs this year. Most of us, in one way or another, want to believe it can’t really get much worse.
[See 5 pieces missing from Obama’s stimulus plan.]
Sorry to say, it can. Here’s why it’s taking so long to resolve the biggest problems our economy faces:
The housing bust. We know now that we’ve been living through a classic bubble in the housing market, where frenzied buyers sensing a rush bid prices far higher than they should have gone. So the market crashed. And now everybody wants to know when home prices will stop falling.
There have been half a dozen government programs to stem foreclosures and help stabilize the housing market. But too much help would falsely subsidize prices once again, and prolong the problem. For the most part, bubbles need to work themselves out.
After the tech bubble burst in 1999, technology stocks took a beating similar to today’s housing market. The tech-heavy Nasdaq stock index sank for about two-and-a-half years, bottoming out in 2002. But it didn’t come roaring back to where it had been. Instead, it began a steady climb out of the basement, aided by Alan Greenspan’s interest rate cuts. By 2007, many of the tech shares that survived had regained ground lost during the bust. But it took nearly a decade.
[See why the feds rescue banks but not homeowners.]
Home prices peaked in 2006, so we’re more than two years into the bust. It’s plausible that the slide in prices will end later this year or in 2010. But keep in mind that tech stocks recovered during a booming economy – which obviously we don’t have right now. In some areas it could easily take another five years for housing markets to return to normal.
Broken banks. The markets rise and fall on every whisper out of Washington about the direction of President Obama’s bank-bailout plan. But whatever the plan, it will take years before the balance sheets of teetering titans like Citigroup and Bank of America are healthy again. An effective plan might generate confidence that the feds are on the case, but there is no conceiveable plan that will repair the most troubled banks anytime soon.
[See why bank nationalization is so scary.]
Part of their problem is a mountain of losses stemming from mortgage foreclosures, which helped make the last quarter of 2008 one of the worst ever for the nation’s banks. But bigger losses are coming, as the recession deepens, more workers lose their jobs, and default rates on other kinds of consumer loans spike. Then there are those trillions of dollars worth of mortgage-baked securities and other assets that nobody has wanted to buy for almost a year. They’re worth something, but nobody knows what, and until that starts to become clearer, buyers will sit and wait.
The government has bailed out and wound down many banks before – and it’s usually a muddle-through affair that lasts a long time. That’s because failing banks are usually saddled with assets that have plunged in value and are hard to sell. After the Resolution Trust Corporation took over several thousand S&Ls in the 1980s, it took more than five years to sell much of the real estate and other assets that brought these banks down. It could take just as long to unwind the huge portfolios of troubled securities at Citigroup and other banks.
[See what Citigroup and AIG will look like in a year.]
If there’s any good news, it’s that the working parts of these banks will continue to function while the broken parts get dismantled. That’s what the federal interventions are supposed to do. In other words, they might resume something that looks like normal lending before all the problems are solved.
Other failing companies. If not for federal relief, other staggering companies like AIG, General Motors, and Chrysler, would be well into bankruptcy proceedings, and possibly headed toward liquidation. Federal aid has prevented that – but even so, the transformation of those companies is starting to look similar to a Chapter 11 reorganization.
AIG, for instance, is selling off many of its assets and lines of business, to raise cash it can use to pay back government loans. GM is killing off divisions, slashing its workforce, and making draconian deals with unions. To get some idea of how long this might go on, consider the bankruptcy of United Airlines, which lasted more than three years. And that was under court-ordered deadlines. GM has predicted that even if it gets all the money it’s asking for from the government, it won’t break even until 2011 or have significant free cash flow until 2014. AIG may have to wait nearly five years just for its vast portfolio of credit-default swaps, one key source of its problems, to expire. So this sorry show will be airing for a long time. If you want to switch it off for awhile, that might be a good idea.
[See 9 bailout surprises from GM and Chrysler.]
Layoffs. As consumers spend less and the economy contracts, companies cut jobs. And they won’t add them back until they’re damn sure the economy is improving. The Fed and many others expect unemployment to rise to nearly 9 percent this year, from 7.6 percent now. That may start to come down in 2010 – but like everything else, slowly.
[See why the media is hyperventilating over unemployment.]
Plunging confidence. Americans are worth a lot less then they were a couple years ago. The Federal Reserve said recently that since the recession started in December 2007, the aggregate net worth of Americans has fallen by 23 percent, thanks largely to declines in home values and investment portfolios. And that was only through last October. Just about everything has gotten worse since then. So Americans’ feel poorer, and they’re a lot more worried about their jobs, too. No surprise consumers have sharply cut back spending – which makes companies cut even more jobs.
Americans will start to feel a little better when the biggest problems stop getting worse, layoffs subside, and there's less worry about getting or keeping a job. And when will that be? Not soon enough for most of us. But if you take a longer view, the recovery might not seem so far off.

http://www.usnews.com/blogs/flowchart/2009/2/27/why-its-taking-so-long-to-fix-the-economy.html

US banks may need more bail-outs, says Ben Bernanke

US banks may need more bail-outs, says Ben Bernanke
Stock markets across the world suffered a second day of turbulence as the Chairman of the Federal Reserve warned that the US Government may have to pour even more cash into the twin bail-outs of its financial and economic systems.

By Edmund Conway and Angela Monaghan
Last Updated: 9:37PM GMT 03 Mar 2009


Ben Bernanke said the White House would have to consider increasing the scope of its $750bn banking rescue package, as well as readying further aggressive measures to shore up the world's biggest economy. His warning to Congress came as shares in London slid to a new six-year low amid disquiet about the stability of Britain's banks following Monday's cash calls from HSBC and AIG.

The Fed Chairman also remarked that although the government had little choice but to rescue AIG with a further $30bn cash injection, the episode had made him "more angry" than any other episode in the past 18 months.

Until the financial system had been repaired the economy would not recover, he said, adding: "Without a reasonable degree of financial stability, a sustainable recovery will not occur. Although progress has been made on the financial front since last fall, more needs to be done."

The comments indicate that the US Treasury, which has put its weight behind a asset insurance scheme for bad assets much like the UK's asset protection scheme, will have to spend more than originally anticipated on rescuing the banks. The Obama administration has slated for up to $750bn in new support to be spent on the banking bail-out in its first budget.

"We are better off moving aggressively today to solve our economic problems; the alternative could be a prolonged episode of stagnation," he said.

The comments saw the benchmark Dow Jones index of leading US stocks to drop 30 points, having dropped beneath the 7,000 mark on Monday for the first time in 12 years. It finished the day down 37.27 points, or 0.55pc, at 6726.02.

The FTSE 100 index closed down 113.74 points, or 3.14pc, at 3512.09.

A CBI study nevertheless showed that British companies were slightly more optimistic about their ability to obtain credit over the next three months in February. Their ability to place corporate paper also improved.

http://www.telegraph.co.uk/finance/financetopics/financialcrisis/4934220/US-banks-may-need-more-bail-outs-says-Ben-Bernanke.html

U.S. Pressed to Add Billions to Bailouts

U.S. Pressed to Add Billions to Bailouts


By EDMUND L. ANDREWS, ANDREW ROSS SORKIN and MARY WILLIAMS WALSH
Published: February 23, 2009

Related
Across the Atlantic, Echoes in R.B.S.’s Lifeline (February 24, 2009)
A Third Rescue Would Give Washington a 40% Stake in Citigroup (February 24, 2009)
New York Financier Picked as Top Adviser on Auto Industry Bailout (February 24, 2009)
Times Topics: Credit Crisis - Bailout Plan


The government faced mounting pressure on Monday to put billions more in some of the nation’s biggest banks, two of the biggest automakers and the biggest insurance company, despite the billions it has already committed to rescuing them.
The government’s boldest rescue to date, its $150 billion commitment for the insurance giant American International Group, is foundering. A.I.G. indicated on Monday it was now negotiating for tens of billions of dollars in additional assistance as losses have mounted.
Separately, the Obama administration confirmed it was in discussions to aid Citigroup, the recipient of $45 billion so far, that could raise the government’s stake in the banking company to as much as 40 percent.
The Treasury Department named a special adviser to work with General Motors and Chrysler, two of Detroit’s biggest automakers, which are seeking $22 billion on top of the $17 billion already granted to them.
All these companies’ mushrooming needs reflect just how hard it is to stanch the flow of losses as the economy deteriorates. Even though the government’s finances are being stretched — and still more aid might be needed in the future — it is being forced to fill the growing holes in the finances of these companies out of fear that the demise of an important company could set off a chain reaction.
The deepening global downturn is dragging down all kinds of businesses, and, with no bottom to the recession in sight, investors sent the Standard & Poor’s 500-stock index down 3.5 percent, to its lowest close since April 1997. The Dow industrials fell 250.89 points, to 7,114.78, a 3.7 percent drop.
In an unexpectedly assertive joint statement after two weeks of bank stock declines, the Treasury Department, the Federal Reserve and federal bank regulatory agencies announced that the government might demand a direct ownership stake in major banks that do not have enough capital to weather a deeper downturn. The government will begin conducting a test of the banks’ financial health this week.
Administration officials emphasized that nationalizing any of the major banks was their least favorite solution to the banking crisis, but they acknowledged that some banks might be both too big to fail and too fragile to endure another round of shocks without substantial help.
The administration is debating how big a role to play in the auto businesses, what concessions the companies should make in return for aid and whether bankruptcy should be considered, though it prefers a private sector solution. On Monday, Steven Rattner, co-founder of the private equity firm Quadrangle Group, was named an adviser to the Treasury on restructuring the auto industry. As the administration takes bigger stakes in companies, the value held by existing shareholders is being diluted, which could make it even harder to attract private money in the future. Timothy F. Geithner, the secretary of the Treasury, recently outlined a bank recovery plan that included a new program to attract a combination of public and private money to buy troubled mortgages and other assets.
A.I.G. serves as a cautionary note about the difficulty of luring private investors when the size of the losses is unknown. In the months since the government initially stepped in last fall to take an 80 percent stake in the insurer, the company has suffered deepening losses and has been forced to post more collateral with its trading partners. The company, according to a person close to the negotiations, is discussing the prospect of converting the government’s $40 billion in preferred shares into common equity.
The prototype could turn out to be Citigroup, which is negotiating with regulators to replace the government’s nonvoting preferred shares with shares that are convertible into common stock.
“We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,” said one senior administration official, who spoke on condition of anonymity. But, he continued, the government is already deeply involved in propping up the banking system and may have no choice.
Officials said they were bracing for the possibility of new problems that might indeed require the government to take a more aggressive stance.
“Given our involvement at this particular stage, there is an element, a possibility over time, that we will end up with some ownership of these institutions,” the official said. “This is really about aggressive anticipatory action. It is an acceptance that the future is uncertain, but that we can plan on a certain basis for it.”
Acquiring common stock would give the government more control, but expose it to more risk. Armed with voting shares, government officials would have more power to replace management and change company strategy. But the Treasury would lose its claim to dividend payments, which in Citigroup’s case amount to more than $2.25 billion a year.
A.I.G. declined to provide details of its new financial problems, citing the “quiet period” just before it issues fourth-quarter results. But some people familiar with A.I.G.’s negotiations said it was on the brink of reporting one of the biggest year-end losses in American history.
Such losses lead to a bigger problem. A further credit rating downgrade would force the company to raise more capital, according to a person involved in the negotiations. The losses appeared to be across the board, unlike the insurer’s giant losses of last September, which were confined mostly to the derivative contracts, called credit-default swaps, that A.I.G. had written as insurance on other debts.
A.I.G. has not been writing new credit-default swap contracts, and had tried to put the swaps disaster behind it. In November the company worked out a relief package with the Federal Reserve Bank of New York, in which the most toxic of its swap contracts were put into a kind of quarantine, so they could no longer hurt its balance sheet.
But A.I.G. put only one type of credit-default swaps into the quarantine. It had written several other classes of credit-default swaps, which it has continued to carry on its books.
If the latest round of losses severely weaken A.I.G.’s capital and its creditworthiness, then its swap counterparties may be entitled to demand that A.I.G. come up with a large amount of cash for collateral — precisely the problem that brought the company to its knees last September.
“They stand, unfortunately, to bring others down with them if they go down,” said Donn Vickrey of Gradient Analytics, an independent research firm. Last fall, when A.I.G. received its initial $85 billion from the Fed, he estimated that the total cost of bailing out A.I.G. would eventually mount to $250 billion. “We are moving closer and closer to that prediction,” he said Monday.
The difficulty of shoring up A.I.G. must weigh on the administration at this moment. The administration’s banking statement amounted to a plan of action demonstrating a way to demand a major and possibly a controlling stake in systemically important banks like Citigroup and Bank of America.
“They are desperate to not nationalize the banks,” said Robert J. Barbera, chief economist at ITG. “They know what happened when they took Iraq and they would just as soon not take over the banks, because if you own it, you gotta fix it.”
Eric Dash and Michael J. de la Merced contributed reporting.

http://www.nytimes.com/2009/02/24/business/24bailout.html?_r=1&ref=business