Re: Treasury Announces Financial Stability Plan

Re: Treasury Announces Financial Stability Plan

DATE: FEBRUARY 10, 2009

TO: NCOIL LEGISLATORS

FROM: MIKE HUMPHREYS, NCOIL

RE: TREASURY ANNOUNCES FINANCIAL STABILITY PLAN

SENATE PASSES STIMULUS

Below, please find links to the following information:

  • Fact Sheet: Financial Stability Plan (2/10 U.S. Department of Treasury)
  • Geithner Unveils New Bank Rescue Plan (2/10 Fortune)
  • For House and Senate, It’s Time to Compromise (2/10 CNN)

This morning, U.S. Treasury Secretary Tim Geithner announced a broad four-point plan to stabilize the financial services industry. Secretary Geithner did not put a price tag on the new plan—which aims to restart the flow of credit and would compliment economic stimulus legislation in Congress—but did say that the Administration would not immediately ask Congress for more money. Also today, the U.S. Senate voted 61-37 to approve stimulus legislation, the American Recovery and Reinvestment Act of 2009.

ECONOMIC STIMULUS LEGISLATION

With this afternoon’s Senate vote to approve economic stimulus legislation, the House and Senate versions will go to Conference. President Obama has asked that Congress approve the stimulus package before Monday, February 16.

Of note to state lawmakers is a “State Fiscal Stabilization Fund” provision in the legislation. While the House bill calls for around $80 billion to help state and local governments fund education and other services, the Senate approved around $40 billion. The Senate also eliminated flexible funding for states to use to avert budget cuts in certain areas. A link to an article outlining key differences between the bills is above.

FINANCIAL STABILITY PLAN

Announcing the plan, Secretary Geithner said “It is essential for every American to understand that the battle for economic recovery must be fought on two fronts. We have to both jumpstart job creation and private investment, and we must get credit flowing again to businesses and families.”

Guiding Principles

Secretary Geithner announced several principles that will shape their stability strategy including:

  • the policy response has to be comprehensive and forceful
  • action has to be sustained until recovery is firmly established
  • access to public support is a privilege, not a right
  • policies must be designed to mobilize and leverage private capital, not to supplant or discourage private capital
  • the U.S. has to send a clear and consistent signal that we will act to prevent the catastrophic failure of financial institutions that would damage the broader economy

Transparency & Accountability

The Secretary called for “greater transparency, accountability and conditionality with tougher standards for firms receiving exceptional assistance.” In line with that, the plan would:

  • require companies receiving aid to show how the new capital will be used to generate lending
  • create a public web site ( for the American people to track where their tax dollars are going
  • limit executive compensation at companies receiving aid
  • require capital recipients to participate in mortgage foreclosure mitigation programs

Four-Point Financial Stability Plan

The new plan addresses a Financial Stability Trust, a Public-Private Investment Fund, a Consumer and Business Lending Initiative, and an Affordable Housing Support and Foreclosure Prevention Plan. Bullets below indicate aspects of the new initiatives.

  1. Financial Stability Trust
  • A Capital Assistance Program (CAP) will be used to provide additional capital to companies that have undergone a “stress test.”
  • The “stress test” will review whether companies have appropriate capital to continue lending during economic hardship. It would apply to companies with assets exceeding $100 billion.
  • Improved public disclosures will also be required of banking institutions.
  • CAP investments by Treasury will be placed in, and managed by, a Financial Stability Trust.
  1. Public-Private Investment Fund
  • The Fund would provide capital and government financing to “cleanse” institutions of their bad or “legacy” assets.
  • Working with the FDIC and the Federal Reserve, the Treasury program would use public financing to leverage and create private sector buying capacity (initially a goal of $500 billion)—minimizing public capital and maximizing private capital.
  • The private market will determine the price of the bad assets.
  1. Consumer and Business Lending Initiative
  2. Working alongside the Federal Reserve, the Treasury initiative would expand a Term Asset-Backed Securities Loan Facility (TALF)—announced last November—by providing up to $100 billion.
  3. The initiative aims to “kick-start lending” by providing financing to private investors—in exchange for existing assets—in order to free up capital.
  4. Affordable Housing Support and Foreclosure Prevention Plan
  • While Secretary Geithner announced that the Administration would announce a comprehensive housing/foreclosure plan in the coming weeks, he said that the plan would seek to drive down mortgage rates and help to reduce monthly mortgage payments, among other things.

Feel free to contact me by reply e-mail or at 202-220-3014 should you have any questions.

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