Geithner Banks on Private Cash

Treasury Secretary Says Investors Needed to Help U.S. Rid Balance Sheets of Bad Assets

By DEBORAH SOLOMON

WASHINGTON -- Treasury Secretary Timothy Geithner said the only way to resolve the financial crisis is to work with the private sector to remove troubled assets clogging banks' balance sheets, even at a time when Wall Street moneymakers are being vilified by the public and politicians.

In an interview with The Wall Street Journal Sunday, Mr. Geithner said the government cannot do this alone. "Our judgment is that the best way to get through this is if we can work with the markets," he said. "We don't want the government to assume all the risk. We want the private sector to work with us."

Mr. Geithner's three-pronged program, which will be unveiled Monday, envisions the creation of a series of public-private investments to soak up $500 billion, and maybe as much as $1 trillion, in troubled loans and securities at the heart of the financial crisis. To encourage investors to buy those assets, the U.S. government will offer lucrative subsidies and shoulder much of the risk.

Taxpayers will stand to reap gains -- alongside investors such as hedge funds and private-equity firms -- if the investments ultimately prove profitable.

The effort is part of Mr. Geithner's broader plan to stabilize the financial system and builds on earlier programs to pump capital into banks, restart consumer and small-business lending, and help some homeowners pay their mortgages. Many economists argue that financial firms need to purge troubled loans and securities clogging their balance sheets if they are to regain the confidence to resume lending.

Mr. Geithner outlined the latest effort in general terms last month, and Wall Street has been eagerly awaiting details. But the rollout comes at an inopportune time, with bailout fatigue turning to bailout rage amid a furor over bonus payments to employees of insurer American International Group Inc.

As a result, whether or not the prescription is correct to fix what ails the financial sector, there is likely to be concern about an effort that appears to reward Wall Street. Some investors have already said they're leery of working with the government for fear the rules will change midstream, as is happening with Congress's moves to cap Wall Street bonuses for firms receiving financial aid.

To encourage investor participation, the Treasury believes participants in the program shouldn't be subject to executive-pay rules imposed by Congress. The law authorizing the $700 billion bailout and a provision in the $787 billion stimulus package impose tough pay restrictions on firms that receive government funds, including limits on bonuses.

The Obama administration believes those provisions shouldn't apply to such broad programs, and an exception was made last month for participants in the Federal Reserve's consumer-lending facility, which provides loans to investors who agree to buy certain asset-backed securities.

Administration officials are hoping the public will draw a distinction between financial firms that receive a government rescue, such as AIG, and those such as hedge funds and private-equity firms that participate as investors in broad government programs.

Many on Wall Street, shell-shocked from the assault on their practices from Washington, are withholding judgment until they see more details.

Banks that are still holding troubled assets at relatively high values may be reluctant to sell for fear they won't get a high enough bid to avoid having to take a huge write-down. Other firms, such as Goldman Sachs Group Inc. and Morgan Stanley, have already written down the value of their troubled loans and may have an easier time selling assets into the public-private partnerships.

An official at one large U.S. bank said the program will be launched more smoothly if a high income tax on some bonuses, such as passed by the House last week, is watered down or tabled. In recent days, various financial-industry executives have warned against a tax that's retroactive, saying it would hurt their ability to keep valued employees.

The Treasury plans to contribute between $75 billion and $100 billion from its $700 billion bailout to the programs to remove troubled real-estate-related assets from bank balance sheets, with the possibility of additional money in the future. The Fed and the Federal Deposit Insurance Corp. will provide other forms of financing, including low-risk loans.

Targeting mortgages that banks no longer want to hold, the Treasury and the FDIC will provide financing to buyers. The FDIC will auction off pools of loans that a bank wants to sell and will become a co-owner by forming a partnership with the highest bidder.

The partnership will then raise FDIC-guaranteed debt to finance a portion of the purchase price, with the Treasury willing to kick in between 50% and 80% of the equity needed to buy the assets. The Treasury will be an equal investor in the partnerships.

To tackle risky securities, such as those backed by mortgages, the Treasury will create several investment funds run by private investors who meet certain criteria, such as experience managing similar assets. Treasury again will act as a co-investor, in most cases contributing $1 for every $1 contributed by the private sector and sharing equally in any gains or losses.

Lastly, the government will expand the Fed's Term Asset-Backed Securities Loan Facility, or TALF, to help absorb older, riskier assets. It was set up to buy newly issued securities backing all manner of consumer and small-business loans. But some of the most troubled assets are securities created in 2005, 2006 and 2007.

The rollout represents a test for Mr. Geithner, whose short tenure has been marred by controversy over his personal taxes, criticism of the lack of detail in his February bank-bailout announcement, and his involvement in the AIG bonus furor. Some questioned why he didn't know of the AIG bonuses sooner.

President Barack Obama said on CBS's "60 Minutes" Sunday that Mr. Geithner is "as sharp and as skilled a public servant as we have." The president joked that were Mr. Geithner to offer his resignation, he would say, "Sorry, buddy, you've still got the job."

Two senior Republican senators, Charles Grassley of Iowa and Judd Gregg of New Hampshire, offered their support for Mr. Geithner's efforts. "I do think that, in the area of trying to stabilize the financial sector of our economy, they're doing the right things," Sen. Judd said on "State of the Union" on CNN. "They haven't done it as definitively as they should have, clearly…but they are moving in the right direction."

In a nod to the political resonance of the executive-pay issue, Mr. Geithner intends to recommend the Fed be given powers to ensure that compensation at large financial firms isn't divorced from long-term performance. Such a change would be one element of the broader revamp of financial-market oversight set to be announced next week.