Treasury already has power to buy into failing companies

Regulators Outline Steps to Quell Crisis

By Deborah Solomon
The Wall Street Journal
Tuesday, October 7, 2008

http://online.wsj.com/article/SB122334263094210175.html?

WASHINGTON -- Worsening market turmoil prompted U.S. financial regulators to outline steps they are using to boost the balance sheets of institutions reeling from the crisis.

The Treasury Department is under pressure to show meaningful results from its newfound authority to buy $700 billion of distressed assets, which Congress approved last week. Treasury is expected to begin buying assets within a few weeks through the use of auctions. But if market conditions continue to deteriorate, it could make use of another tool at its disposal: investing directly in troubled companies.

Treasury has the power to directly inject capital into a failing firm by taking a significant equity stake. In an unusual statement issued Monday, the President's Working Group on Financial Markets, noting that "conditions in the U.S. and global financial markets remain extremely strained," said Treasury could "directly strengthen the balance sheet of individual institutions."

Such a move, however, is likely only to occur if a firm is teetering on the brink of collapse and poses a systemic risk to the financial sector, according to people familiar with the matter.

The core of Treasury's plan is to conduct auctions as quickly as possible to buy bad loans and other distressed securities from financial institutions.

Treasury is aiming to hire asset managers as early as this week and, as expected, Treasury Secretary Henry Paulson named Neel Kashkari as interim assistant secretary for financial stability, to head up the program within Treasury.

Mr. Kashkari, 35 years old, was trained as an aerospace engineer and worked for NASA before earning his MBA at the University of Pennsylvania's Wharton School and going to work as a banker at Goldman Sachs Group Inc. As assistant Treasury secretary for international affairs, he had become a key adviser to Mr. Paulson.

Tom Gallagher, analyst with research organization ISI Group, said Treasury's "biggest challenge is to have a successful launch. ... It has to be convincing that it's going to provide some meaningful relief." While Treasury's asset-purchase program may have some impact, Mr. Gallagher said the bigger role is for the Federal Reserve, which moved Monday to inject more liquidity into the marketplace.

The PWG statement was meant to help assuage nervous investors, whose concerns have made them reluctant to put capital into institutions. The PWG is headed by Mr. Paulson and consists of the heads of the Fed, Securities and Exchange Commission and the Commodity Futures Trading Commission.

* * *

GATA is a civil rights and educational organization based in the United States and tax-exempt under the U.S. Internal Revenue Code. Its e-mail dispatches are free, and you can subscribe at http://www.gata.org/.