EconoMonitor

Peterson Institute for International Economics

Is the United States De-emphasizing its Bank Clean-Up Plan?

Michael Mussa discusses the reasons why the Obama administration’s plan to remove toxic loans from bank balance sheets may turn out to be unnecessary.

Recorded June 8, 2009. © Peterson Institute for International Economics.

Steve Weisman: This is Steve Weisman at the Peterson Institute for International Economics. Our guest, Michael Mussa, a senior fellow at the Peterson Institute, is here to talk about the latest actions by the federal government and in particular, the Treasury and the Fed, toward banks. Thanks for joining us, Mike.

Michael Mussa: My pleasure.

Steve Weisman: Mike, I want to ask you about the bank rescue, which you and I have discussed in this forum. There are news reports today, June 8, that a key part of the Treasury’s announced program, an elaborate mechanism to allow banks to sell off their socalled toxic assets, is not working or it’s been suspended. What is going on and why?

Michael Mussa: Well, it hasn’t really been launched yet. They’re in the process of designating the firms that would become the managers of these public-private investment trusts. But they haven’t even announced that yet and we’re not behind schedule very much in terms of what they were intending. But it looks now as if they’re deemphasizing the program, particularly the part of it that was supposed to be dealing with bank loans as opposed to securities, and that was going to be partially financed by the FDIC. I think this is linked to the results of the stress tests, which were publicly released a month ago, and to the indications that a number of the larger banks that were the subject of the stress tests have been able to raise significant capital in private markets,suggesting that there isn’t really such a large need for a government-sponsored program to purchase assets off their balance sheets. I think, last time when we talked about it, I suggested that there might be a limited purpose for this program but the notion that it was a grand solution to the entire problem was a bit overdone.

Steve Weisman: What loans are we talking about that the banks would be selling off under this program that is being deemphasized? Credit card loans, commercial loans?

Michael Mussa: Yes, some credit card loans, some commercial loans, the loans that banks typically do hold on their balance sheet, as opposed to those things that they package into securities and then sell off to other purchasers. The securities are a separate aspect of it. There’s a difference in the accounting treatment. The loans are carried at their acquisition cost less a modest reserve; the securities are marked to market at the end of every accounting period. So there’s been less pressure on the valuation of the loans on the balance sheets than there has been on the securities.

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