New TARP Unveiled Today, Finding Homes for Bad Mortgages

President Obama, in his first prime-time press conference, continually deferred questions of mortgage crisis and financial sector recovery to his Treasury Secretary. Timothy Geithner is scheduled to reveal his approach to financial system rescue and clearing out troubled mortgages.

The new Troubled Asset Relief Program (TARP) plan has been the center of much speculation and market anticipation over the last several weeks. Concepts from "bad banks" to nationalization of major banks, like Bank of America have been theorized. However, the only assurance given markets was issued last night by President Obama--Geithner's announcement will contain "very clear and specific plans" to loosen credit.

The TARP was created last October to backstop the balance sheets of the nation's largest banks. The initial funds were used by the US government to inject capital into 300 financial institutions, including AIG, Bank of America, Citigroup, as well as lending support to GM and Chrysler.

Having spent half of the $700 billion TARP fund, Geithner must present Congress with a plan to release the remaining $350 billion. A plan that is already sparking debate on various leaks.

Early anticipation surrounded a potential aggregator or "bad bank" that would buy toxic mortgage assets off of the balance sheets of banks. This strategy would potentially remove illiquid assets and allow banks to loosen credit to consumers. However, the challenges is the same one the private sector is faced with--pricing the assets. Pay to little and you fail to help the banks lend, pay too much and the taxpayers take the hit.

The latest preference seems to be for an asset insurance plan. This approach has also been employed with Citigroup and Bank of America. Designed much like traditional private mortgage insurance, the bank would absorb a specific firsttraunch of potential losses with the government on the hook for the rest.

Geithner may also use this approach to draw in significant private sector funds by helping to finance, via the Federal Reserve, similar insurance from these mortgage insurance firms. This is attractive because it not only uses more private sector funding, but it leaves the infrastructure to experienced players. This plan would avoid the government creating new expertise and infrastructure to administer the plan.

There is also interest in what the foreclosure assistance program will look like under the new TARP. President Obama has stated he wants $50 billion to $100 billion earmarked for foreclosure prevention.

Many of the details and approaches have been leaking with few new or creative ideas. The most significant question to be answered is, what is the "pound of flesh" to be demanded of the banks.

These "attached strings" have already created comments from large banks that are already feeling obstructions in their recovery. Most notably JP Morgan Chase and Bank of America Jamie Diamond and Ken Lewisrespectively have stated urgency to get government TARP funds back out of the banks as soon as possible.