Obama’s bind over aid to banks
More US money won’t be easy to win, complicating his efforts to restore the system to health.
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Credit-market experts say Obama’s best opportunity to fix the banking system is right now, as a new president with a clean slate. Treasury Secretary Timothy Geithner has said the plan will be “comprehensive.” Details are expected next week, perhaps as soon as Monday.Skip to next paragraph
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The goal is to help revive healthy credit markets. In the process, lending may not increase, but the key is, “You don’t want the lending to collapse,” says Simon Johnson, an economist at the MIT Sloan School of Management in Cambridge, Mass.
He puts the likely cost for taxpayers at about $1 trillion – to cover some of the losses and to put in the new capital needed to revive the system. That number reflects the tab after accounting for gains that the government may reap by taking an equity position in banks or receiving fees from them.
But how much gets spent, and when, depends on the way any new rescue efforts are structured.
The options for the Obama team fall into three main categories, and according to public statements and news reports, the package is likely to be a mixture of these measures rather than an either-or approach:
•Option 1 is for regulators to nationalize. A bank judged to be insolvent would be closed, then reopened under federal control. The most troubled assets could be broken out and liquidated, while a healthy remaining bank could eventually be privatized again.
This has the advantage of simplicity, and possibly the lowest cost to taxpayers.
But opponents say the government is ill-equipped to make this Plan A, especially since it might involve nationalizing a handful of the largest US banks.
•Option 2 is to buy the troubled assets to clean up bank books. A key challenge here is how to set a price that’s fair to banks and taxpayers – and lots of money would be needed up front.
Mr. Johnson reckons that going wholly down this road might require $3 trillion to $4 trillion, although the net cost to taxpayers in the end might be close to $1 trillion.
The administration might use this approach for some assets that banks are keen to sell.
•Option 3 is to leave the bad assets where they are but create a government insurance guarantee that limits the potential losses that banks will take. This has already been done, partially, in deals with Citigroup and Bank of America.
By some accounts, this approach will play a key role for assets that, although generating some income from borrowers, would fetch very low prices if sold now.
The key for taxpayers here would be the price for such insurance, and the question is whether it would succeed in restoring confidence in the economy. Johnson says this rescue strategy is the most complicated and opaque of the three. But it would allow the government to keep initial costs down. Losses would come later.