Treasury To Unveil "Aggregator" Bank

(AP Photo/Ron Edmonds)

CBS News has learned that the key component of this new plan will be an "aggregator" bank which will be formed to assume the troubled assets that have plagued the financial system. It will be capitalized initially by Troubled Asset Relief Program (TARP) funds -- the financial bailout money passed by Congress in the fall.

But the key to this strategy is that the bank will also be funded by private investors, such as hedge funds.

The Wall Street Journal and the New York Times also are reporting on the plan's components.

The Journal describes the centerpiece as an "aggregator bank," which also be come to be known as a "bad bank." The entity would buy assets that are clogging the financial system and would be seeded with money from the bailout fund, but most of the money would come from the private sources.

The Journal reports: "Some critical elements remained unclear, including exactly how the government would entice investors to participate in the private bank, given that they can already buy soured assets on the open market if they want to. The government will likely offer some type of incentive, such as limiting the risk associated with buying the assets."

The Journal also gives some insight as to how the administration came to this idea.

"The Obama administration views the private bank as a way to get around the thorny issue of having to determine a price for soured assets such as certain mortgage-backed securities, many of which are illiquid and hard to value. The government has long worried that if it bought toxic assets and paid too much for them, banks would benefit at the expense of taxpayers -- while if the price was too low, it would force banks to take further write-downs and exacerbate their woes.

"The Treasury's working theory for the government/private-sector partnership is that investors wouldn't overpay, because if they did, they'd stand to lose money; but they also wouldn't underpay, since the selling banks wouldn't be willing to part with their assets too cheaply."

The Atlantic's Marc Ambinder, CBS News' chief political consultant, reports that from a public relations perspective, the administration is going to go out of its way to get people to use the phrase "public/private partnership" rather than "bad bank."

The Times zeroes in on the incentives needed to entice private investors like hedge funds, private equity funds or insurance companies to buy the contaminated assets.

According to the Times, the government would guarantee a floor value on the assets. The idea is to get other private entities involved so that the government does not have to directly take on a huge number of risky assets at above market prices.

The Times reports: "The officials say they are counting on the profit motive to create a market for those assets. The government would guarantee a floor value, officials say, as a way to overcome investors' reluctance to buy them."

Both the Times and the Journal report that this is only part of the Treasury's plan to be announced tomorrow. Other components include injecting more capital into some banks, giving more homeowners relief from foreclosures and expanding a Bush administration program encouraging student loans.

The Journal reports that the plan may also give the Federal Deposit Insurance Corp. power over more troubled financial firms beyond the depository institutions it now regulates, but that could require legislation.

Geithner's announcement had been scheduled for today, but was moved back until tomorrow so that President Obama can be the focus today as he continues vigorously selling the other key component of the administration's economic plan – the $800 billion stimulus package still being debated in Congress. Mr. Obama held a town hall meeting in Indiana today and will continue his offensive with a press conference from the White House tonight.