The Financial Stability Plan

This morning, Treasury Secy. Timothy Geithner announced the Financial Stability Plan, geared to revive the banking system by way “attack[ing] our credit crisis on all fronts with our full arsenal […]

This morning, Treasury Secy. Timothy Geithner announced the Financial Stability Plan, geared to revive the banking system by way “attack[ing] our credit crisis on all fronts with our full arsenal of financial tools and the resources.”

The plan calls for up to $2 trillion combined in a public-private investment fund and a consumer and business lending initiative, according to FinancialStability.gov, the Web site set up to help promote the Treasury’s plan.

One area of particular note is is the plan’s outline for Housing Support and Foreclosure Prevention that includes efforts intended to drive down mortgage rates, allots $50 billion to prevent so-called avoidable foreclosures, as well as to provide more flexibility in Hope for Homeowners and FHA.

More on the plan:

1. Financial Stability Trust — The Financial Stability Trust includes a comprehensive “stress test” or assessment of what banks need to continue lending, even through a severe economic downturn; a Capital Assistance Program (CAP) that will provide banks access to a “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital; and a trust fund so that any capital investments made by Treasury under CAP will be placed in this separate entity and managed accordingly.

2. Public-Private Investment Fund ($500 Billion — $1 Trillion) – Working together in partnership with the FDIC and the Federal Reserve, the Treasury will initiate a Public-Private Investment Fund to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as “legacy” assets. There are two aspects of this Investment Fund:

*Public-Private Capital (involves putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion).

*Private-Sector Pricing of Assets (involves allowing private-sector buyers to determine the price for current troubled and previously illiquid assets).

3. Consumer and Business Lending Initiative (Up to $1 trillion) — The Consumer and Business Lending Initiative will support the purchase of loans by providing the financing to private investors to help unfreeze and lower interest rates for auto, small business, credit card, and other consumer and business credit. Moreover, in order to protect taxpayers, the Consumer and Business Lending Initiative limits purchases to newly packaged AAA loans and expands the initial reach of the Term Asset-Backed Securities Loan Facility to now include commercial mortgage-backed securities.

4. Transparency and Accountability Agenda — The Financial Stability Plan will call for greater transparency, accountability, and conditionality with tougher standards for firms receiving exceptional assistance. These will be the new standards going forward and are not retroactive. Financial institutions that receive assistance must describe how many new loans they issue. Treasury will post contracts with firms that receive assistance on the Web site FinancialStability.gov.

5. Affordable Housing Support and Foreclosure Prevention Plan — Secretary Geithner plans to introduce a plan to address the foreclosure crisis that builds on the work of Congressional leaders and the FDIC within the next few weeks. He announced that the plan will:

  • Drive down overall mortgage rates
  • Commit $50 billion to prevent avoidable foreclosures
  • Avoid foreclosures by reducing monthly payments
  • Establish loan modification guidelines and standards for government and private programs
  • Require all Financial Stability Plan recipients to participate in foreclosure mitigation plans consistent with Treasury’s guidance
  • Build flexibility into the Hope for Homeowners program and the FHA to enable loan modifications for a greater number of distressed borrowers

6. A Small Business and Community Lending Initiative – Over the next several days, President Obama, the Treasury Department, and the SBA will announce the launch of a Small Business and Community Bank Lending Initiative. This collaborative effort will seek to arrest the decline in SBA lending through:

  • Use of the Consumer and Business Lending Initiative to finance the purchase of AAA-rated SBA loans to unfreeze secondary markets for small business loans.
  • An increase in the guarantee for SBA loans to 90%: The Administration is seeking to pass in the American Recovery and Reinvestment Act an increase in the guarantee of SBA loans from as low as 75% to as high as 90%.
  • A reduction in fees for SBA 7(a) and 504 lending, and funds for both oversight and speedier and less burdensome processing of loan applications.

Thanks to NCRC for helping to distill the above information — MBH

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