Breathe a sigh of relief: More than six months after the financial crisis erupted, a complete bailout regime is finally in place.
The bank rescue plan (.pdf file) finally unveiled by Treasury Secretary Timothy Geithner is the last major piece of a vast bailout strategy that's been evolving since September, when Lehman Bros. (LEHMQ, news, msgs) failed and American International Group (AIG, news, msgs) and Merrill Lynch almost did.
Having a full plan in place doesn't mean it will work. But officials at the White House, Treasury and Federal Reserve can now transition from designing the biggest financial bailout in 70 years -- which could ultimately cost more than $2 trillion -- to executing it.
If you've lost track of what the government is actually doing, you get a pass. The bailout efforts have developed in fits and starts, from TARP to TALF to a bunch of other arcane-sounding programs. (See the Treasury's official list.) Some have been scrapped before they've started. Others have been rolled out quietly, then expanded to become major parts of the relief effort. And the bailouts don't include stimulus spending, tax cuts or monetary-policy maneuvers by the Federal Reserve.
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The Obama administration now calls its various bailout efforts the Financial Stability Plan, and it's developing a Web site to explain it all. Meanwhile, here's a quick score card to help track the government's biggest moves, how much they're costing and what the prospects for success seem to be:
Buying 'toxic' assets
This was the original idea of the TARP, the Troubled Asset Relief Program, announced in October. But it's taken a long time for the government to actually relieve banks of any troubled assets, such as mortgage-backed securities and related derivatives, that have become unsellable and are clogging the financial system.- U.S. News: More companies at risk of failing
Geithner's latest plan, the Public-Private Investment Program (.pdf file), or PPIP, is basically a refined and expanded version on the original TARP, with some key differences. Instead of the government directly buying these securities from banks -- with taxpayers bearing all this risk if the price turned out to be too high -- Geithner's plan will use federal loans and other subsidies to help pools of private investors buy securities at discounted prices, in the hope that their value will rise as the economy and housing market recover. If sold for a profit in the future, the government and the private investors will split the gain. If the securities fall in value, both sides will lose, but the government will lose more.
Approximate cost: Details are still somewhat sketchy, but the government wants to fuel the purchase of up to $1 trillion in dicey securities. That could require up to $70 billion in government spending for equity stakes in the securities and well more than $500 billion in federal financing or financing guarantees. If the plan works, investors will repay the loans, and the government will earn a profit on its equity investments. But if the securities ultimately lose value, compared with what the partnership has paid, taxpayers will bear most of the loss.
Prospects: Some big investors are enthused; others are skeptical. "The politics of this are very, very hard," Geithner said recently. If private companies got too much of a sweetheart deal, for instance, it could spark a public uproar like the furor over the AIG bonuses. But limiting the private upside could discourage participation. The government still needs to establish clear ground rules and procedures for auctioning off securities, which could take a while. It might not be clear until summer or fall whether the PPIP is working or whether Geithner needs to come up with something else.
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Recapitalizing the banks
During the Bush administration, the original TARP morphed into a different plan, now known as the Capital Purchase Program, to inject money directly into banks by buying preferred shares that could be converted into common equity. President Barack Obama and Geithner have basically left that in place. This money -- including $45 billion apiece for Citigroup and Bank of America -- hasn't been used to relieve anybody of their troubled assets. Instead, it's helped provide more capital to banks that are required to set aside funds to cover losses, helping keep them solvent.Approximate cost: about $200 billion so far, going to about 500 institutions.
Prospects: Theoretically, the Capital Purchase Program should help banks ramp up lending because it provides capital they'd need to keep in reserve to cover potential losses. But banks that have been burned by bad loans have been reluctant to risk making more of them. Oh, by the way, just to make sure you're paying attention, the Treasury will transfer some of the Capital Purchase Program expenditures to a new Capital Assistance Program (.pdf file), once it has run stress tests on 19 of the biggest banks to determine how healthy they are and how much more money they may need.
Continued: Unwinding AIG and saving Detroit
