US Treasury considering allowing insurers, auto-makers to access Tarp

Speaking on US television yesterday morning, US Treasury assistant secretary for financial institutions David Nason refused to state categorically whether insurance companies and auto manufacturers would be able to exchange equity for federal money under the Troubled Assets Relief Program (Tarp). But Nason conceded that sectors that play integral roles in providing credit to the US economy will have their requests heard.

“The reason we focused on the banks first is because of their role in financial stability and providing credit to the economy. When you take that analysis and move it to different industries you have to think about whether or not [allocating funds to non-banking industries] is important for systemic financial stability,” said Nason.

“The second issue is that we rely heavily on federal regulators to give us an indication of how strong banking institutions are and how much capital they need. In other industries we don’t have that benefit, so that is a significant challenge that we will have to take some time thinking about. We started with the banks but there are a lot of industries coming in and saying they need federal assistance and we are willing to listen to their asks,” he added.

Nason’s comments emerged at the start of a week that will see the first stages of several federal initiatives to inject further credit directly into US institutions.

Late on October 26, the Treasury executed agreements to inject $125 billion into the nine largest US banks in exchange for equity, with $25 billion apiece allocated to Citigroup, Wells Fargo, JP Morgan and Bank of America, while Morgan Stanley and Goldman Sachs will both receive $10 billion.

Bank of New York Mellon will get a $3 billion injection, and Boston-based State Street will receive a $2 billion preferred stock purchase. In addition, 10 regional US banks will receive a combined $31 billion in the second round of equity infusions, including large regional players such as PNC Bank and Capital One, which are receiving $7.7 billion and $3.6 billion respectively, and smaller institutions such as upstate New York’s First Niagara Bank, which will receive a $186 million infusion.

Yesterday also saw the commencement of the Treasury’s Commercial Paper Funding Facility (CPFF) scheme to buy commercial paper from firms – both banks and non-financial entities. The programme is intended to restart the market for short-term corporate funding that has seized up since money market funds fled the sector following the collapse of Lehman Brothers.

The Federal Reserve Bank of New York announced it will charge 1.88% to buy unsecured commercial paper and 3.88% to buy asset-backed commercial paper, having previously confirmed that it would base pricing on the three-month overnight index swap rate, plus a spread of 100 basis points for unsecured paper and 300bp for asset-backed paper.

No firm deadline has emerged as yet for the most controversial element of the Tarp scheme – the Treasury’s plan to buy distressed illiquid assets directly from financial institutions in a series of auctions. Nason only clarified that the commencement of the programme is weeks rather than days away and that efforts to hire asset managers that will administer the programme are ongoing.

See also: US Treasury changes course on Tarp CIO

Treasury to take $125bn equity in nine US banks, says Paulson

$700bn Tarp might only take equity in healthy banks, hints US Treasury

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