A New US Option: An "Aggregator Bank"

From The Wall Street Journal, a short excerpt from an interview with FDIC head Bair, and an excerpt and link to a longer Financial Times piece from yesterday on newer options being considered by policymakers, and the dire financial situation prompting such shifts.

January 16, 2009, 6:05 pm
WSJ Interview: FDIC’s Bair Fleshes Out ‘Aggregator Bank’ Idea

Federal Deposit Insurance Corp. Chairman Sheila Bair spoke with The Wall Street Journal’s Damian Paletta about some of the options regulators are considering to target the assets weighing down banks.

WSJ: There has been some discussion about the federal government creating an “aggregator bank,” which would be a facility that could buy troubled assets from financial institutions. How would it work?

Ms. Bair: The idea here is that the aggregator bank would buy the assets at fair value. Some are concerned that you’d have to mark the assets down to purchase them, but I think it could help provide some rational pricing, actually, for the market in some of these assets because we don’t have really any rational pricing right now for some of these asset categories.

The idea would be to set up a facility, it could be structured as a bank, to capitalize it with some portion of the TARP funds. Financial institutions that wanted to sell assets into the bank could also perhaps take part of their payment as an equity interest in the aggregator bank to provide an additional cushion. If you sold $1 of assets into the bank, you would get 80 cents in cash and you would get 20 cents in an equity interest in the bank. So that would be an additional cushion against loss.

With a combination of private equity contributions plus tarp capital, I think you could leverage that into some fairly significant volume to purchase assets.

WSJ: What would the aggregator bank do with the assets?

Ms. Bair: The aggregator bank could use multiple tools. It might want to hold some of the assets. It might make sense to just hold them for a while. You might want to securitize some of them. You could do a covered bond issue. I think there are lot of different strategies that could be used to get these assets back into the market.

WSJ: Why do regulators think it’s important to do address the assets?

Ms. Bair: I think everybody agrees it’s important to provide some troubled asset relief, because I think it’s key to getting private equity capital back into banks. They need to have some certainty about what the tail risk is on some of these assets. By doing the insurance wrap or providing a bank to just get them off the balance sheet complete, I think that would help us get some private capital back into banks.

WSJ: What is the status of talks? Are they at a hypothetical stage?

Ms. Bair: It’s beyond hypothetical. I think all of the agencies are committed to coming up with a program for troubled asset relief. We’re vetting the various different structures, the pros and cons of those. I think we would all like to have something in place in the not too distant future. I’m hoping the decision making on it would be fairly quick. It has been discussed for some time. So I think we are nearing the point to make a decision. But it’s complicated. We want to make sure we get it right.

from the
Financial Times

Governments eye new tools for credit crisis

By Peter Thal Larsen
Financial Times
Published: January 16 2009 20:11 | Last updated: January 16 2009 20:11

When governments in Europe and the US unveiled co-ordinated bail-outs of their banking industries last October, politicians and regulators rightly believed they had narrowly avoided a collapse of confidence of the financial system.

But this week it became clear governments will have to take on even more risk from the private sector if they are to restore the flow of credit to the economy.

Citigroup’s $8bn loss for the fourth quarter offers a vivid illustration of how the government bail-outs have failed to stabilise flailing markets and a deteriorating economy that continues to undermine the value of banks’ assets.

The US government’s decision, finalised late on Thursday, to insure Bank of America against “unusually large losses” on $118bn (89bn euros, 80bn pounds) of loans on its balance sheet underscores the sheer scale of the commitments taxpayers are being forced to make to shore up confidence.

If government intervention were limited to mopping up the residual mess left over from last year, this would represent little more than a minor headache.

But the real problem facing policymakers is that, despite spending or committing hundreds of billions of dollars, the banking system is still not distributing credit to the economy. Consumers and companies are being starved of credit, raising the prospect of a continuing downward economic spiral.

Read the rest of the article

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