New Details on Banking Aid Package

White House Now Plans Limited Bank Aid Package

The Obama administration has decided on a new package of aid measures for the financial services industry, including a bad bank component, and is expected to announce them next Monday, according to a source familiar with the planning

The plan will be "smaller" than originally expected, said the industry source, and centered around government guarantees and insurance of troubled assets, what's called a "ring fence" concept.

"Everybody seems to like that," said the source. "There's a lot of internal conflict about whether this [the bad bank] makes sense ... they realize they have to do something with the bad bank."

Progress On Pricing Issue

The latest round of discussions also appear to have addressed the most controversial aspect of the big bank concept: Pricing.

Under the emerging plan, the government will buy toxic assets below the banks "carrying value," which is basically market value, but not at fire sale levels, the source said.

That approach will likely placate both taxpayer and Congressional concerns about the government over-paying for the assets. But, the source noted, it could "trigger an accounting problem for the banks," presumably because the institutions will have to report a loss on the transactions.

The Obama administration is now working on ideas to address that, which might entail a temporary suspension of certain accounting rules.

The current plan is expected to be smaller in that it will be paid for out of the remaining money in the original TARP plan, which is about $350 billion. Some of that money, however, will remain earmarked for home foreclosure relief.

Experts estimate there are some $1.5-$2.0 trillion in such bad assets, either of the non-performing or illiquid variety.

The ring fence concept has already been used with Citigroup [C 3.47 -0.02 (-0.5%) ] and Bank of America [BAC 4.33 -0.37 (-7.87%) ]. It involves government guarantees and insurance provisions for groups of bad assets, but they remain on the balance sheet of the institution. The bad bank concept literally removes them. Both approaches are meant to spur new lending by banks.

Thus far, the bulk of the government's aid under the TARP program has been through a capital-for-equity swap. The so-called capital injection method was adopted at the urging of Congress late last September and then wound up replacing Paulson's original, primary tool of a government auction to buy the troubled assets.

The capital injection program, however, is not expected to be a major part of the new aid package, according to the source. It will also be tweaked, apparently, so that the government receives convertible preferred stock, instead of the current preferred stock. The former can be converted into common stock, which is how some would now like to see the government take its equity stake.

Regardless of the merits of one measure or another, there's growing consensus in both government and banking that a one-size-fits-all approach is inappropriate. JPMorgan Chase [JPM 23.81 -0.23 (-0.96%) ] CEO Jamie Dimon, for one, has made that point recently.

Potitical Factors

The latest developments come as Congressional support for the bad bank concept and additional financial support for the financial sector is fading.

In a news conference Wednesday afternoon, House Speaker Nancy Pelosi (D.-Calif.) said she was "not so sure" that another bailout request from the Obama administration is inevitable, reversing an a previously-held assumption.

Sen. Charles Schumer (D-NY), a senior member of the Senate Banking Committee, Tuesday joined the bad-bank skeptics, telling CNBC the approach would be "hugely expensive" and added he prefers government guarantees of such assets.



Congressional Democrats, led by House Financial Services Committee Chairman Barney Frank (D.-Mass.) have shared with the new administration their anger and disappointment over former Treasury Secretary Henry Paulson’s administration of the TARP program, which was seen as too generous to and too lenient on Wall Street firms.

They've also made it clear that they want significant government funding to aid consumer borrowers, small business and the housing industry, as well as tighter rules on executive pay for firms participating in the TARP. President Obama unveiled those rules Wednesday.

Frank Wednesday announced that the committee will hold a hearing on firms' use of TARP money to date and will call on eight big-name CEOs to testify. They include Ken Lewis (BofA), Vikram Pandit (Citigroup), Dimon, (JPMorgan Chase), John Mack (Morgan Stanley [MS 24.38 2.37 (+10.77%) ]) and Lloyd Blankfein (Goldman Sachs [G 8.44 0.20 (+2.43%) ]).

The source said the Obama administration is keenly aware of all the political dynamic and is thus proceeding at a cautious pace.

Details are expected to be announced Monday. Treasury Secretary Tim Geithner next week will brief the respective houses of Congress on a variety of new measures meant to ease the credit crunch.

Mikey says: the most important thing to note here is The Government is taking an equity position in the banks. That means that when you own a bank the goverment is your partner. They have deeeeeep pockets. That is a very good thing. If you are in a bank CD that is also guaranteed by the Government. Same thing in my mind. The bet here is that the govenment does not blown up. I will make that bet every time. At some point they are going to get it right.