Capital Markets

Treasury Fires Up Plan to Thaw Credit

The head of the new office that will buy banks' troubled assets explains how the agency is gearing up to spend up to $700 billion.
Sarah JohnsonOctober 13, 2008

The newly established Treasury office, tasked with buying up to $700 billion worth of troubled financial assets from banks, has been “working around the clock” to prepare itself to stabilize the credit markets, according to its leader, Neel Kashkari.

In a speech to the Institute of International Bankers this morning, Kashkari — named last week as interim assistant secretary of the Office of Financial Stability — said his office’s Troubled Asset Relief Program (TARP) will “attack the capital and troubled asset problems from multiple directions so American families and businesses can get the credit they need.”

So far, that work has laid the groundwork for the eventual purchases of banks’ distressed assets, which Treasury Secretary Henry Paulson has said may not begin for several weeks. Kashkari, a 35-year-old former Goldman Sachs executive, did not specify how the agency will try to save the hurting financial services sector. The agency will consider reverse auctions, partial ownership of banks, and more interventions “to prevent and impending failure of a systematically significant institution,” he said.

Since the law establishing the new Treasury office and broadening its authority was passed October 3, the agency has appointed executives, consulted with regulators, established an oversight board, and created seven teams to figure out how Treasury will fulfill its various new responsibilities.

Kashkari’s TARP office will also rely on the expertise of outside advisers. The agency solicited consultancies last week and has received proposals for a “master custodian firm” to hold and track its purchased assets, a securities asset manager, and a whole loan asset manager. Investment management consultant Ennis Knupp has been hired to review asset manager proposals.

Three of TARP’s internal seven teams will be directly involved in how the agency will spend its new allowance for the purchase of mortgage-backed securities; whole loans, particularly from regional banks; and equity stakes of financial institutions. Kashkari said the equity purchase program will be voluntary and have “attractive terms to encourage participation from healthy institutions.” Moreover, TARP will insure troubled assts and consider ways to help financially distressed homeowners, Kashkari said.

Supporting Kashkari’s efforts are five “key interim leaders,” including Thomas Bloom, a veteran federal CFO who has been loaned to the Treasury from his CFO job at the Office of the Comptroller of the Currency. Like the interim chief risk officer, compliance officer and other executives involved in TARP, Bloom is responsible for setting up his new department, hiring staff, overseeing his office’s operations, and identifying a permanent successor.

Keeping tabs on TARP will be its oversight board, chaired by Federal Reserve chairman Ben Bernanke; U.S. acting comptroller general Gene Dodaro; and two accounting firms, which have not yet been selected, to review TARP’s finances and internal controls.