Treasury Hashing Out Plan; Grants Access to Insurers

The Obama administration Saturday continued to work on the details of a wide-ranging plan to stabilize the financial system set to be unveiled Tuesday.

Thus far the government has only said that Treasury Secretary Geithner will lay out a "strategy to strengthen our economy by getting credit flowing again to families and businesses."

CNBC has learned, however, that officials are likely to indicate that the government has approved capital injections to insurance companies with thrift-structured lending units that have applied for government aid under the TARP program.

Thus far only AIG has received funding under the program, but that happened after the government amended various terms of its original aid package, which came in the emergency environment of last September before the TARP was created.

If the Treasury does take such a step with insurance companies, Genworth Financial, Lincoln Nationaland Hartford Financial Services Groupwould be first, according to the source.

The announcemement will also cover a number of aid measures to financial firms, including the purchase of toxic assets at the heart of the crisis, a revised cash-for-equity program and government guarantees on other bad assets held in firms, according to a source familiar with the government's planning.

Funding for the plan is understood to be coming from the second $350 billion of the TARP. It's unclear if that money would cover all the initiatives, new and existing, including the capital injections, known as the PCP, to the guarantees, known as a ring fence or backstop.

Various sources have given CNBC different sums. Late Friday, sources told CNBC that it could involve the purchase of as much as $500 billion in troubled assets from financial institutions. It was unclear, however, where that money would come from. In addition, every bank would be subject to a uniform "stress test" to see if the bank needs additional capital, according to a person briefed on the matter.

Aid to Small Businesses, Consumers

The government is also known to be working on a group of measures to aid small business and consumers, including programs to support the housing market—from interest-rate subsidies to home foreclosure relief. Those subjects, as well as new rules on transparency for firms receiving government aid, have been discussed in the last week, according to a source.


CNBC reported Friday that sources say a foreclosure component will be included in Monday's announcement

The government will buy toxic assets below the banks' "carrying value," which is basically market value, but not at fire-sale levels, the source said, representing something of a compromise.

Such a pricing approach will likely placate both taxpayer and Congressional concerns about the government overpaying for the assets. But, the source noted, it could "trigger an accounting problem for the banks," presumably because the institutions will have to report a loss on the transactions.

'Fast Money' on the Bank Bailout:

The Obama administration is now working on ideas to address that, which might entail a temporary suspension of certain accounting rules. It is unclear what that might be, said the source.

In making the announcement Friday, the Treasury also said Geithner would outline "new measures and conditions to strengthen accountability, oversight and transparency in how taxpayer dollars are spent."

The Treasury statement provided no further details.

Other Measures Up For Debate

The current plan is expected to be smaller than previously expected in that it will be paid for out of the remaining money in the original TARP plan, which is about $350 billion. Some of that money, however, will remain earmarked for home foreclosure relief.

The size of the problem is far bigger than that. Experts estimate there are some $1.5 trillion to $2 trillion in such bad assets, either of the non-performing or illiquid variety.

The ring-fence concept, which is part of what's being discussed, has already been used withCitigroup andBank of America. It involves government guarantees and insurance provisions for groups of bad assets, but they remain on the balance sheet of the institution. The bad bank concept literally removes them. Both approaches are meant to spur new lending by banks.

Thus far, the bulk of the government's aid under the TARP program has been through a capital-for-equity swap. The so-called capital injection method was adopted at the urging of Congress late last September and then wound up replacing Paulson's original, primary tool of a government auction to buy the troubled assets.

The capital injection program is expected to be revised such that the government receives convertible preferred stock, instead of the current preferred stock. New limits on executive pay were imposed earlier this week.

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The former include an option to be converted, usually any time after a predetermined date, into an amount of common stock, which is how some would now like to see the government take its equity stake.

Rep. Brad Sherman (D.-Calif.)—a senior member of the House Financial Services Committee who voted against the original TARP and favors the capital injection model—is concerned that the ring fence concept might include a multiplier approach in backing troubled assets, rather than a virtual dollar-for-dollar approach.

"And the question is: will the Fed participate," asks Sherman. If so, he says, it would clearly give the government more money to work with.

Political Factors

The latest developments come as Congressional support for the bad bank concept and additional financial support for the banking sector has faded.

Sen. Charles Schumer (D-NY), asenior member of the Senate Banking Committee, Tuesday joined the bad-bank skeptics, telling CNBC the approach would be "hugely expensive," adding that he prefers government guarantees of such assets.

House Speaker Nancy Pelosi (D.-Calif.) Wednesday said she was "not so sure" that another bailout request from the Obama administration is inevitable, reversing an a previously-held assumption.

For Investors

Congressional Democrats, led by House Financial Services Committee Chairman Barney Frank (D.-Mass.) have told the new administration that they are angry and disappointed that former Treasury Secretary Henry Paulson’s administration of the TARP program was both too generous to and too lenient on Wall Street firms.

They've also made it clear that they want significant government funding to aid consumer borrowers, small business and the housing industry, as well as tighter rules on executive pay for firms participating in the TARP. President Obama unveiled those rules Wednesday.

Geithner met with House Democrats Saturday, according to Reuters told them firms receiving aid would have to make mortgage loan modifications.

Citigroup has already agreed to such terms in receiving what the government calls "exceptional" aid.

Tougher terms on lending have significant support among House Democrats, but even some proponents say they wind up being somewhat toothless.

The source said the Obama administration is keenly aware of the political dynamic and is thus proceeding at a cautious pace, knowing it will need support all along the way if it is to seek new funding authority requiring Congressional approval.

The timing of the announcement on Monday speaks to that issue. Starting Tuesday, Geithner will brief the respective houses of Congress on a variety of new measures meant to ease the credit crunch.

- CNBC Senior Economics Reporter Steve Liesman contributed to this report.