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THE FINANCIAL CRISIS

Bailout team gets started

A key position is filled and financial firms are invited to become loan portfolio managers.

October 07, 2008|Jim Puzzanghera | Times Staff Writer

WASHINGTON — The Bush administration took its first steps Monday to implement the $700-billion bailout for the financial system, tapping a Treasury Department official to lead efforts to buy securities tied to troubled loans and soliciting applications from financial institutions to manage the portfolios.

The rescue plan approved by a divided Congress on Friday gives Treasury Secretary Henry M. Paulson 45 days to put a plan in place, but it may not take that long. Treasury officials gave firms seeking to manage portfolios a deadline of Wednesday to submit applications, and initial selections will be made next week.

But although the plan may move ahead of schedule, the results may not be immediate, President Bush cautioned.

"We don't want to rush into this situation and not have the program be effective. It's going to take a while to restore confidence in the financial system," Bush said after meeting with small-business owners at a San Antonio pharmacy. "But one thing people can be certain of is that the bill I signed is a big step toward solving this problem."

The first major step the administration took toward activating the broad powers in the Emergency Economic Stabilization Act was naming Neel Kashkari to run the program. Kashkari is a former colleague of Paulson at the Wall Street firm Goldman Sachs Group Inc., where Paulson served as chairman.

Kashkari, the assistant Treasury secretary for international economics and development, arrived at the department with Paulson in July 2006 as a senior advisor. Kashkari had been a vice president at Goldman's office in San Francisco.

Kashkari will be the temporary head of the Office of Financial Stability. The next president is expected to make a permanent appointment, which must be confirmed by the Senate.

The announcement was important to show Wall Street that the asset purchases may begin soon, said Henning Bohn, an economics professor at UC Santa Barbara.

"Right now, there are a lot of anxieties around, so making a move that says, 'We're on it' is helpful," he said. "You may question that there's another Goldman guy going in there, but that's what we have now."

The President's Working Group on Financial Markets -- a panel set up by Bush in 2007 that includes Paulson and Federal Reserve Chairman Ben S. Bernanke -- promised Monday to move rapidly to begin the asset purchases. The group also promised to administer the program "in a transparent and methodical fashion."

The Treasury Department released new details Monday about how the assets would be purchased and detailed guidelines for companies to apply to manage the portfolios. The department said it would select "multiple" asset managers and sub-managers but did not release numbers. Paulson has said he would like to hire five to 10 asset managers.

The department said it would select two groups of asset managers: those for whole loans, such as residential first mortgages that the government would own outright, and those for mortgaged-backed securities. Companies hired to manage the assets will be designated as "financial agents of the United States," not contractors, giving them a responsibility for protecting the interests of the U.S.

Banks, credit unions and security brokers in the United States and its territories are eligible. Central banks and other institutions owned by foreign governments are not eligible.

The Treasury Department also posted public notices soliciting applications for asset managers and a quick timetable to make the selections. Companies looking to manage a whole-loan portfolio must currently manage at least $25 billion in mortgage loans, or show that they can manage a portfolio at least that size. Companies seeking to manage securities must currently manage at least $100 billion in fixed-income assets.

Companies have until 2 p.m. PST Wednesday to file applications. The Treasury Department said it would seek more detailed information in a second phase and warned that the selection process "may involve extremely short deadlines for submitting information and for traveling to Washington, D.C., for meetings or interviews."

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jim.puzzanghera@latimes.com

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