The U.S. Department of Treasury is proving it is nothing if not flexible. Before dawn this morning, Treasury issued a statement that it will use the authority granted under the Emergency Economic Stabilization Act to restructure insurance giant AIG. Valued at roughly $150 billion, Treasury is retooling its earlier bailout of the insurance company with a program that includes the purchase of $40 billion worth of AIG senior preferred stock, $30 billion to purchase securities underlying credit default swaps, $22.5 billion for purchasing residential mortgage securities, and other reductions in outstanding debt and interest rates. There are strings attached – executive pay and bonuses will be restricted as well as corporate expenses and lobbying. Treasury is clearly reacting to market conditions and flexing the Troubled Asset Relief Program (TARP) accordingly. However, today's and other recent Treasury actions raise an important question: Is Treasury's reactive approach helping or just prolonging the uncertainty plaguing the financial markets?

Treasury's inconsistency means an automotive industry rescue package is still possible. The Interim Secretary for Financial Stability, Neel Kashkari, told an audience of financial executives this morning, "The TARP's foremost purpose is to stabilize the financial system," and their goal is "to use the TARP to attack the root cause of the financial market turmoil." Is Treasury prepared to adopt a comprehensive, consistent strategy to address the crisis? Or will the agency continue to dig for new solutions?

On the tactical side, Treasury is looking for a few good asset managers to implement the Capital Purchase Program (CPP). In a November 7th notice, Treasury said it seeks "multiple Financial Institutions to provide asset management services for the portfolio of senior preferred shares, senior debt, warrants and other equity securities and debt obligations that the Treasury will receive from public and private Financial Institutions participating in the CPP." The notice adds that Treasury may also use these services for other programs in addition to the CPP.

Treasury anticipates assigning each asset manager a certain portfolio of Financial Institutions, and the asset manager will perform the following services --

  • Value assets issued by public and private financial institutions and analyze the financial condition, capital structure, and risks of the financial institutions;
  • Conduct equity and debt financial analysis on behalf of Treasury; advise on the optimal disposition of Treasury's assets; and execute transactions (according to Treasury's instructions and "Investment Policy and Guidelines"); and
  • Provide Treasury with detailed analysis and recommendations on corporate actions, proxy voting, disclosures, consents, waivers, and anything else affecting Treasury's ownership stake and compliance responsibilities.

According to Treasury, "The size of the overall portfolio will reach hundreds of billions of dollars, and will likely involve securities and obligations issued by thousands of public and private Financial Institutions." Treasury will pick large and small asset managers that have at least $100 million in dollar-denominated assets under management. The attached document contains the details of the application process, and applications are due no later than November 13, 2008 at 5 p.m. ET.

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