U.S. Plots New Phase in Banking Bailout

RDX:New Face? 这不是最早最早被骂的一塌糊涂的计划么 现在发现没办法了？

WASHINGTON -- The U.S. government, recognizing that the banking crisis is far larger than originally thought, is laying the groundwork for a second phase of its rescue attempt, with plans to purge bad assets that are paralyzing the financial system.

Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp., in consultation with the incoming Obama administration, are discussing a plan to create a government bank that would buy up the bad investments and loans that are behind the huge losses that U.S. banks continue to report, say government officials. Also under consideration is an additional and giant government guarantee of banks' assets against further losses.

The discussions, which are intensifying, show how the rapid deterioration of bank assets is outpacing the government's rescue efforts. Banks are now struggling not only with the real-estate investments that sparked the crisis, but also with the car loans, credit-card debt and other consumer debt that have taken a hit with the faltering economy.

Sheila Bair

The latest government proposals are aimed at attracting private capital back to the banking system, efforts that have until now largely failed. "All of these ideas are designed ultimately to facilitate more lending in the economy," said FDIC Chairman Sheila Bair. "It's essential to get some private capital back into these banks."

Goldman Sachs economists estimate that financial institutions and investors world-wide will ultimately realize $2 trillion in losses on U.S. loans, but have recognized only half those losses so far. That scares investors who might otherwise give banks needed capital, and makes banks reluctant to make new loans. Regulators say they worry that the only remaining source of capital for banks is the government.

That was underscored by Friday's announcements of deep losses at Citigroup Inc. and Bank of America Corp. At earlier stages of the crisis, these institutions had been considered among the potential deep-pocketed saviors for struggling banks and mortgage lenders.

Citigroup disclosed an $8.3 billion fourth-quarter net loss as the bank was hammered by writedowns on bad loans and securities. Bank of America, which recently absorbed Countrywide Financial and Merrill Lynch, reported a fourth-quarter loss of $1.79 billion. That came as new details emerged Friday that Bank of America had made an agreement with the government for $20 billion in additional federal aid to help it complete its Merrill purchase.

The struggles aren't limited to big banks. Late Friday, the Office of the Comptroller of the Currency said it had closed National Bank of Commerce in Berkeley, Ill. The bank had large holdings of Fannie Mae and Freddie Mac preferred shares, which were wiped out when the government took over the mortgage giants last September. The bank had $431 million of assets.

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The U.K., too, is mulling new financial bailout options, including setting up a so-called "bad bank" to house troubled assets, a sign that the financial system's woes continue to deepen globally. This week, U.K. banking stalwarts such as Barclays PLC have seen their shares clobbered. On Friday, the day authorities lifted a ban on short-selling, Barclays shares were down 25%. In a statement Friday, Barclays officials said the bank expects to beat analyst expectations when it reports its 2008 results next month.

In the U.S., Federal Reserve officials are advocating aggressive action to take assets such as mortgage-backed securities off the balance sheets of financial firms. The incoming Obama administration, which shares the Fed's belief that these assets are impeding financial and economic recovery, is also exploring ways to deal with the matter.

Getting a greater commitment from lawmakers could be a hurdle. Lawmakers have been critical of the Bush administration's handling of the early stages of the bailout. The Congressional Budget Office estimated Friday that taxpayers could lose $64 billion on investments made with the first third of the $700 billion Troubled Asset Relief Program, despite assurances by U.S. officials that the rescue could make money for the U.S. government.

It is unclear whether the plans now under discussion would require Congress to authorize more money beyond its $700 billion financial bailout fund. Congress released the second half of the Troubled Asset Relief Program on Thursday, but a chunk has already been committed to helping homeowners, U.S. auto makers and Bank of America.

The idea of buying up bad bank assets echoes the original idea of Treasury Secretary Henry Paulson, who asked Congress in September to fund the plan. Mr. Paulson abandoned that idea in favor of investing directly in banks after he concluded that the program would be too slow, costly and difficult to implement.

The switch to making direct investments helped stave off a collapse of the financial system in September. But it did little to get banks back on track.

Henry Paulson

"You can't solve the overall economic problem if you can't get the financial institutions lending again," said Martin Feldstein, a Harvard economist who has consulted with the new Democratic majority on Capitol Hill and is former head of the Council of Economic Advisors under President Ronald Reagan. "And you can't do that as long as they don't know what the value [of their troubled assets] is, particularly the residential mortgage-backed securities and derivatives based on them."

On Friday, Mr. Paulson said regulators are still interested in removing bad bank assets from the financial system and are considering many ways of doing that, including an "aggregator bank" that could purchase the securities, transferring the risk of holding them to the government.

Fed officials have made similar public comments. "The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new and private investment and new lending," Federal Reserve Chairman Ben Bernanke said in London on Tuesday.

One idea would be to use bailout funds to capitalize a "bad bank." The entity could then raise a substantial amount of cash by issuing government-backed debt. Ms. Bair said banks that sell assets to the government fund could become part owners. The government bank could hold the assets, sell them or securitize them.

Ms. Bair said the assets could be purchased at fair value, the figure banks use to value their own assets. Such a move would remove the challenge of placing a price on assets that rarely trade. That would allow banks to avoid selling their assets for a low price, a move that would force them to take additional write-offs. The opposite danger is that the government would overpay.

Another top option under discussion would be to broaden a technique the government has already used in its rescue of Citigroup and Bank of America. In both instances, the government agreed to share losses with the banks on a certain group of assets. The banks agreed to take the first hit, and taxpayers are on the hook for much of the rest. In the case of Citigroup, the total amount of assets protected is more than $300 billion.

This loss-insuring plan under discussion would be available to banks large and small. Ms. Bair said she and other regulators are keen to provide sweeping solutions instead of the ad hoc approaches of last year. Officials don't agree, though, on whether guarantees could be offered broadly, given the complexity and variety of instruments held by many institutions.

Under the bad-bank plan, financial institutions would rid themselves entirely of the assets. Under the insurance plan, the assets would stay on banks' books. That makes it less preferable, some economists say, because the presence of the bad assets on bank books could worry investors.

Policymakers are also thinking of expanding an existing Fed program that aims to spur lending by encouraging investors to buy newly issued, high-rated securities backed by consumer loans. They could expand it in other ways: for instance by agreeing to guarantee other kinds of securities, such as those backed by commercial real-estate mortgages, or by purchasing lower-rated or previously issued securities.

Write to Deborah Solomon at deborah.solomon@wsj.com, Jon Hilsenrath at jon.hilsenrath@wsj.com and Damian Paletta at damian.paletta@wsj.com