'Bad Bank' Just One Option Considered To Save Financials

The Obama administration and financial industry representatives Saturday discussed a range of measures to ease the credit crunch, including a so-called 'bad bank' component to buy toxic assets.

CNBC.com has now learned that the administration is considering three options for institutions: a) a bad bank, b) more capital injections into institutions and c) a so-called "ring fence" concept, in which the government uses a combination of guarantees and insurance to cover bad assets within an institution without technically removing them from the balance sheet.

The plan could entail using one or a combination of the options, according to a source familiar with the discussions.


At the same time, the administration is considering another set of measures for homeowners, including tax breaks, interest rate subsidies, additional purchases of GSE debt--as the Federal Reserve has done recently--and even direct assistance, the source said. It is unclear exactly what the latter would entail.

If progress continues to be made an announcement is likely late next week, according to the source.

Earlier this week, Treasury Secretary Timothy Geithner said the administration was considering a "range of options."

Talks on aiding the financial sector resumed Saturday, following a round Friday when speculation arose that a snag had been hit over the bad bank concept, concerning the thorny issue of how to price the assets, which the banks would sell at a discounted price to the government entity.

In his weekly radio address Saturday, President Obama pledged to help homeowners by lowering mortgage costs under a new plan he said would be unveiled soon, which would revive the financial system and "get credit flowing again."

Many of the consumer measures understood to be under discussion have been at the top of the agenda of Congressional Democrats, who were disappointed by the Bush Administration's execution of the TARP plan because they felt it focused too much financial aid on Wall Street firms, whilch failed to pass along some of the benefits by engaging in new lending or modifying mortgages to avoid foreclosures, an aggravating factor of the housing crisis.

Rep. Barney Frank (D.-Mass.) a fierce critic of the TARP's administration who chairs the powerful House Financial Services Committee, has championed housing relief and earlier this month introduced legislation revising the TARP. That specifically called for $40-$100 billion in funding for easing the foreclosure problem.

Frank's committee is expected to begin mark up of related homeowner relief legislation Tuesday, as part of the overall plan, according to the source.


Talks today apparently yielded agreement on one issue involving the bad bank concept: that the FDIC would run it, according to a source. That scenario has been widely speculated, especially since FDIC Chairwoman Sheila Bair has been a leading proponent of the bad bank concept.

She had already essentially volunteered to have the banking supervision agency administer the program, which it did 15 year ago with a similar program meant to ease the savings and loan crisis.

The Obama administration’s point person on the bad bank concept at this point appears to be Lawrence Summers, director of the National Economic Council.

The concept of a government-run entity that would buy the troubled assets of private sector firms to help clean up their balance sheets has gained considerable momentum since Federal Reserve Chairman Ben Bernanke mentioned it prominently in a major speech two weeks ago.

But like an earlier auction-based plan conceived by Treasury Secretary Henry Paulson last September, it’s viability has been undermined by questions about how the assets would be valued.

Though all agree that remains a critical hurtle, it is not the only complicating factor. There’s a growing opinion that a one-size-fits all approach is not appropriate and that other measures will need to be included.

The growing range of options supposedly under discussion comes as some have been pushing for more use of the “ring fence” concept, which the Fed and FDIC recently instituted at Citigroup and Bank of America.

Indeed, JPMorgan Chase Chairman & CEO Jamie Dimon has told CNBC more than once in recent days that the bad bank concept is “one tool in the tool kit,” adding it is a “great vehicle” for some banks.

“Some banks don't need it at all,” Dimon said, adding that Chase “probably wouldn’t sell assets to the entity. “I don’t think we need to.”