TARP Czar: AIG bailout isn't start of larger program

Nov 10, 2008 @ 2:05 pm

By Jed Horowitz

The Department of the Treasury’s decision to increase its bailout package to American International Group Inc., the faltering New York-based insurance giant, doesn’t signal a larger effort to aid companies outside the banking sector, a senior Treasury official said Monday.

The decision to invest an additional $150 billion in AIG was “necessary to maintain the stability of our financial system,” Neel Kashkari, the Treasury’s interim assistant secretary for financial stability, said at a securities industry conference in New York.

The Treasury Department previously said that it would invest $123 billion in AIG as part of its $700 billion Troubled Assets Relief Program, which is being used to recapitalize U.S financial institutions.

The government’s decision to aid AIG as well as hundreds of banks and thrifts — but not make loans to the automobile industry and other troubled sectors — has sparked criticism from some Democrats.

Mr. Kashkari characterized Monday’s decision on AIG as “a one-off event that was necessary for financial stability” and “not the start of a new program.”

The assistant secretary, formerly an investment banker at New York-based Goldman Sachs Group Inc., is spending the bulk of his time on a program to invest $250 billion in U.S commercial banks, investment banks and savings institutions.

He said that the program, which was announced on Oct. 14, has already dispensed $125 billion to major firms such as Citigroup Inc. and JPMorgan Chase & Co., both of New York, and is taking applications for additional investments from hundreds of other institutions.

The application deadline is this Thursday, but Mr. Kashkari said the deadline for private bank applications will be extended.

He said that it will take “a few months” for the government to allocate its pool of investment capital and much longer to achieve the government’s purpose of increasing confidence in the U.S banking system and getting banks to make loans to companies and consumers.

“Our markets remain fragile,” Mr. Kashkari said. “Our work is only beginning.”

Mr. Kashkari said that the operational scale and complexities of the bank investment program is “extraordinary” and said that the Treasury Department will work with the incoming Obama administration on an effective transition.

Mr. Kashkari declined to comment about another part of the government plan that has gotten off to slower start: buying billions of dollars of troubled mortgage securities and real estate assets from banks.

That decision belongs to Treasury Secretary Henry Paulson.

Mr. Kashkari said that the government continues to seek financial advisers to manage the debt and equity it is purchasing from banks and hopes to receive applications from smaller minority-owned and women-controlled firms as well as larger asset managers.

Financial advisers have to have $100 million of assets under management to compete.

Some bankers and lawyers attending the conference, which is sponsored by the New York- and Washington-based Securities Industry and Financial Markets Association, were skeptical that banks will quickly use the government infusions to make loans.

Michael Wiseman, a partner at New York-based law firm Sullivan & Cromwell LLP, noted that banks rescued by the government during the Great Depression used their capital to make investments and build equity in order to reassure their depositors and stockholders, not to make loans. Ultimately that led to a restoration of confidence in the banking system.

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