US Weighs New Plan to Buy Banks' Bad Assets: Bair

CNBC.com FDIC Chairman Sheila Bair

Top U.S. policymakers are discussing setting up a government "aggregator bank" that would use federal funds to buy troubled assets from financial institutions, Federal Deposit Insurance Corp Chairman Sheila Bair said Friday.

"We think by leveraging (Troubled Asset Relief Program) funds in this way, we could have significant capacity to buy troubled assets," Bair told CNBC.

Bair said the FDIC, U.S. Treasury Department and Federal Reserve have also discussed leaving troubled assets on banks' balance sheets, but giving them some sort of government insurance wrap, similar to the approach used for the Bank of America deal announced earlier Friday.

Bank of America is receiving a federal backstop against $118 billion of bad assets it holds, as well as $20 billion in fresh government capital, as part of an aid package designed to help it absorb Merrill Lynch & Co.

"We'll support any approach that we think is effective," said Bair, who told CNBC that she will stay on as head of the FDIC after President-elect Barack Obama takes office Tuesday. Bair also said she is unsure whether the government will continue to have to step in to boost financial firms' capital levels. "I hope that further capital injections will not be necessary, but I will not rule out the possibility that they will be needed," she said.

Regarding the idea of an aggregator bank, Bair said such a facility would be capitalized by the second half of the $700 TARP fund. On Thursday the U.S. Senate defeated a resolution that would have blocked Obama from accessing the final $350 billion of the bailout money.

Bair said the aggregator bank would be similar to the Resolution Trust Corp, which liquidated almost $400 billion in assets from more than 700 insolvent savings and loans from 1989 to 1995. Bair said the government could require that banks also raise a portion of private equity if they want to sell troubled assets to the aggregator bank.

"People on the street tell me that private equity investment is holding back now because they don't know what the tail risk is," she said.

She also said the Obama administration is working very hard on a home foreclosure prevention efforts that would use a "significant portion" or TARP funds. "I think they're committed to getting something up and running very quickly," Bair said.

Also Friday, Treasury Secretary Henry Paulson said that a substantial portion of the second half of the rescue fund should be reserved for bank capital programs.

Paulson's comment to reporters on his last full day in office came after Congress agreed not to block the release of the remaining $350 billion in the fund. Paulson also defended his decisions in spending the first half of the TARP on capital injections into banks.

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