Investors want incentive to help with bailout
Overhaul plan to be unveiled today
WASHINGTON - Investors want the Obama administration to sweeten the deal before they agree to buy risky debt from US banks as part of the government's retooled program to rescue the ailing financial industry.
The administration is expected to say today that the government's latest bailout strategy will be enticing big investors to buy more than $1 trillion in troubled assets from the banks. The hope is that, free from the drag of subprime mortgage debt and other bad investments, banks will be more likely to start lending again and the economy will rebound.
Treasury officials, briefing Congress on the plan last night, suggested two approaches that the administration was considering to deal with toxic assets, according to congressional staffers who spoke on condition of anonymity. These aides said the government might provide guarantees for the bad assets to establish a floor on possible losses or perhaps provide low-cost financing through the Federal Reserve for investors willing to purchase the bad assets.
President Obama, speaking at a prime-time news conference last night, promised that his overhaul of the financial rescue program would bring "transparency and oversight" to the heavily criticized program.
He said the overhaul would correct previous mistakes such as a "lack of consistency" and what he said was the failure to require banks to show "some restraint" in terms of executive compensation and spending.
Exactly how the administration plans to persuade hedge funds, insurance companies, and private equity firms to buy into some of the world's riskiest investments remains unclear. But investors said they were unlikely to buy into the idea unless the government puts up a lot of the money and promises to absorb a lot of the losses if things go badly.
"The first loss has got to be the government's," said Wall Street veteran Muriel Siebert, who runs the brokerage Muriel Siebert & Co. "Maybe the first 25 percent of losses. We don't know what's in some of those bonds."
Billionaire Wilbur Ross, who runs the private equity firm WL Ross & Co., said investors want to know how much risk the government will accept if the investments go sour, and how much money the government is willing to put up - likely in the way of low-interest loans.
Treasury Secretary Timothy Geithner will unveil the program in a speech today. The partnership with the private investors would be just one element of a major overhaul of the bailout program, which has come under heavy criticism for distributing billions of dollars with few requirements on how banks would use the money.
"I want to see the incentives and the restrictions," said Jacob Benaroya, managing partner of Biltmore Capital Group, a hedge fund. For example, he said, he's unlikely to buy loans that must be held for 30 years.
The Obama administration wants to find a way to get investors a good deal without bankrupting banks and adding to the economy's woes.