Bernanke: TARP Guarantees, 'Bad Banks' Possible

If the Treasury supplements injections of capital by removing troubled assets such as mortgages from institutions' balance sheets, as was originally proposed for the U.S. financial rescue plan, Treasury may consider public purchases, as originally proposed, or two other options involving asset guarantees or "bad banks," Federal Reserve chairman Ben Bernanke suggested in a speech at the London School of Economics early Tuesday morning. He addressed criticism of such efforts as unfair bailouts of institutions that chose to take excessive risk as necessary given their influence on the financial system and the economy. He said that, "in the future financial firms of any type whose failure would pose a systemic risk must accept especially close regulatory scrutiny of their risk-taking." Under the asset guarantees, the government would agree to absorb, probably in exchange for warrants or some other form of compensation, part of the prospective losses on specified portfolios of troubled assets held by banks, he said. Alternatively, bad banks could purchase assets from financial institutions in exchange for cash or equity in these banks. The chairman also said the facility that is slated to lend against AAA-rated asset-backed securities collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration may, if successful, have its "basic framework" expanded to accommodate additional classes of securities "as situations warrant." Efforts to reduce preventable foreclosures also are being considered, Mr. Bernanke said. The Fed chairman also reportedly said the Obama Administration's proposed stimulus package would be helpful, but not enough to solve the current financial crisis.