Spiraling anger over the bailout and bonuses of American International Group Inc. (AIG: 25.25 +0.44%), has brought to head the issue of regulatory power when it concerns large financial institutions that are not necessarily deposit-taking institutions insured by the government. The issue was taken up by the Obama administration Tuesday, when it began a full-fledged effort to expand the federal government’s power to seize control of any troubled financial institution deemed systematically important to the livelihood of the nation's financial system.

The federal government has long had the power to take over and close banks and other deposit-taking institutions whose deposits are insured by the government and therefore subject to detailed regulation. But currently, "there is no effective legal mechanism to unwind a non-bank financial institution like AIG," said Treasury secretary Timothy Geithner in a testimony before the House Financial Services Committee Tuesday.

The Obama administration and the Fed see an immediate need to extend the government's regulatory authority to insurance companies like A.I.G., hedge funds, investment banks, private equity firms and other financial institution considered "too big to fail."

"As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can," Geithner said.

The Treasury said Wednesday that new legislation — granting additional tools to address "systemically significant financial institutions" that fall outside of the current resolution regime under the FDIC — will be sent to Congress this week. According to a statement by the Treasury, the legislation would allow the government to put a firm — considered by the Treasury and FDIC as requiring emergency measures — into conservatorship or receivership and then to administer its reorganization or wind-down. Critics Critics question whether the Fed should play the decision-making role, instead of the Treasury and FDIC.

The Treasury said the bill would also reduce the need for taxpayer funds by enabling the federal agency as a conservator or receiver to sell or transfer the assets or liabilities of the institution in question, renegotiate institution's contracts and address the company's derivatives portfolio, hopefully reducing the potential for further disruption.

“It is precisely because of the lack of this authority that the A.I.G. situation has gotten worse,” Obama explained in a news conference Tuesday evening, where he also said the government could have handled the AIG bailout more effectively had it had the same power to seize large financial institutions as it did to take over failed banks.

The Treasury and the Fed each submitted their own proposals to the House Financial Services Committee on Tuesday, and President Obama urged Congressional leaders to act quickly on the legislation. House Democrats said they hoped to bring a bill to the House floor within the next several weeks, according to a report by the New York Times.

If the measure passes, it would represent one of the largest permanent expansions of federal regulatory power in years, but Obama suggested Tuesday evening there would likely be "strong support" from the American people and Congress to grant the proposed authority.

Write to Kelly Curran at kelly.curran@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

President Barack Obama is set to meet with a dozen bank leaders Friday, according to various reports. Sources told the Wall Street Journal that executives from Goldman Sachs Group Inc. (GS: 111.77 +2.96%), JP Morgan Chase & Co. (JPM: 37.21 -0.75%) and Citigroup Inc. (C: 30.87 +1.61%) are among those that have been invited to the discussion. As a MarketWatch bulletin reports, the meeting will cover Obama's plans to "put the sector on a sounder footing."

The White House had not yet confirmed the meeting by the time this story was published, but anonymous sources close to the issue had spoken with multiple media outlets as to the itinerary of the discussion. "President Obama will…reiterate his belief that getting the economy back on track will require and understanding that each of us must look beyond our own short-term interests to the wider set of obligations we have to each other in order for America to succeed," sources told msnbc.com on Tuesday.

A Chase spokesperson confirmed to HousingWire the invitation to speak with Obama Friday had been received by the bank, although details on whether bank leaders would attend or what would be discussed were not yet available. HW's sources close to the issue have confirmed Goldman's Lloyd Blankfein and Citigroup's Vikram Pandit are among the leaders invited to speak with the President, although no details could be given regarding the agenda of the discussion. Citigroup and Goldman spokespeople did not return calls seeking official comment before this story was published.

A history of weak confidence
The Treasury Department released details Monday morning before market open of the latest approach to clear toxic loans and securities off of bank’s balance sheets. Saying that “the financial system is still working against economic recovery,” the Treasury said it will earmark up to $100 billion in funds from the Troubled Asset Relief Program, hoping to attract capital from private investors in order to generate $500 billion in purchasing power to buy legacy assets. The announcement sparked some comeback in investor confidence as stocks closed higher Monday.

But the rosiness of secretary Tim Geithner's new plan continues to be overshadowed by severe public and media criticism over the Treasury and Federal Reserve's failure to block the payment of some $165 million in bonuses to top employees of AIG Financial Products, the division largely blamed for the parent insurer's failure. The wave of blame and general search for a pariah in the face of weak financial institutions that have received TARP funds  — along with new restrictions on executive compensation at these firms — has led many such institutions to express their intent to repay Treasury funds as soon as possible. Enforcing the idea that TARP money has become a stigma, banks and financial institutions across the country have publicly said they will not seek government funds.

The fear of nationalization — or at least partial nationalization — of the U.S. banking system was only heightened recently when the Treasury announced it would exchange common stock for the preferred securities of Citigroup obtained by the Treasury through the Capital Purchase Program. Investor and consumer fears linger over the ability of major banks to continue without major government aid.

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Write to Diana Golobay at diana.golobay@housingwire.com.

Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

The Treasury Department saw yet another candidate drop out of the race to fill top positions. Hedge fund manager Frank Brosens has withdrawn his name from consideration for a leading position to head the Treasury's Troubled Asset Relief Program, sources told the Wall Street Journal. Co-founder of Taconic Capital Advisors, Brosens campaigned for President Barack Obama and is a major donor to the Democratic Party. He told the Post he'd dropped out of consideration for a number of reasons, including not wanting to leave his hedge fund or take up the massive commute between Washington, D.C. and the New York-based school his son attends.

Brosens' withdrawal marked the latest in a string of candidate drop-outs for Treasury positions as public and media scrutiny of candidate backgrounds and tax histories has amplified in the wake of several candidate tax flubs. In light of the hostile reaction to bonuses distributed at bailout recipient American International Group Inc. (AIG: 25.25 +0.44%) and the public heaping of blame — not only on AIG officials but on officials of the government branches put in charge of the failed insurer — it's become a trend for such candidates to drop unexpectedly out of the running.

Secretary Tim Geithner has managed the department with a skeleton crew of top advisers while the search for candidates to fill major roles continues. Neel Kashkari has run the TARP since the switch in administrations, but his duration there is temporary; it's unclear now when Kashkari's time at the Treasury will run out. Obama, reacting to the shortage of Treasury officials in top positions under Geithner, late Monday said he'd decided to nominate Treasury veteran Neal Wolin for a lead position under the secretary. He also said he would nominate Clinton Administration veteran Lael Brainard to head international affairs at the Treasury. Wolin and Brainard face Senate confirmations before the appointments are official, but the third nomination announced — Stuart Levey for under secretary for terrorism and financial intelligence, a role he retains — won't require a second confirmation after the initial Senate confirmation in July 2004.

Write to Diana Golobay at diana.golobay@housingwire.com.

President Barack Obama late Monday announced three nominations for key roles to serve under Treasury Department secretary Tim Geithner. The nominations, according to a White House press release, fill three of the four "most senior" positions under the secretary. “I am grateful for the service of these dedicated and talented individuals and have the highest confidence that, under the leadership of Secretary Geithner, they will serve the American people well as we tackle the challenges ahead of us,” Obama said.

The nominee for deputy secretary — and a Treasury veteran who served as general counsel from 1999 to 2001 — is Neal Wolin, the former president and chief operating officer for property and casualty operations at The Hartford Financial Services Group. Wolin briefly served as deputy counsel on economic policy to Obama before being asked to return to the Treasury, White House officials said. A graduate twice of Yale (Yale College and later Yale Law School) and once of the University of Oxford, Wolin brings a strong background of law and economics to the role.

Then, for the role of under secretary of the Treasury for international affairs, Obama said he plans to nominate Lael Brainard. Currently serving as vice president and founding director of the global economy and development program at the Brookings Institute, Brainard is a veteran of the Clinton Administration, where she worked as deputy national economic adviser and deputy assistant for international economics. A graduate twice from Harvard University (masters and doctoral degrees in Economics) and once from Wesleyan University, Brainard brings a rich history of international relations to the position. She has served as the U.S. sherpa to the G8, worked on micro finance in West Africa and received a Council on Foreign Relations International Affairs Fellowship.

Wolin and Brainard both face Senate confirmations.

Obama also nominated, as under secretary for terrorism and financial intelligence, Stuart Levey, who retains the position. Confirmed by the Senate in July 2004, Levey will continue to head the office that marshals the Treasury's efforts to cease financial support abroad to international terrorists, narcotics traffickers and other sources of national threat. A graduate twice from Harvard (Harvard College in 1986 and Harvard Law School in 1989), Levey previously served as principal associate deputy attorney general at the U.S. Department of Justice.

Geithner has been taking the heat lately for the lack of hires in these top positions. After the fourth potential Treasury nominee dropped from the running earlier this month, sources told the Washington Post that under-staffing issues might hamper the Treasury's ability to handle the financial crisis.

Write to Diana Golobay at diana.golobay@housingwire.com.

On the heels of the Treasury's latest plan to work with private investors to purchase private-party RMBS, Fitch Ratings said Monday afternoon that it had revised its projected cumulative loss estimates for 2005-2007 vintage U.S. prime RMBS transactions — in other words, more downgrades are coming. It's probably more accurate to say that Fitch amplified its loss estimates, moving cumulative loss estimates for 2007 vintage prime RMBS approximately five times higher than previously estimated.

"Delinquencies have increased dramatically in prime RMBS transactions as borrowers grapple with the ongoing pressures of declining home values, rising unemployment and lack of refinancing alternatives," said to group managing director and U.S. RMBS group head Huxley Somerville. "From a ratings perspective, the combination of declining credit enhancement and higher expected losses will result in increased ratings pressure for recent vintage prime RMBS."

As part of an ongoing monitoring of RMBS transactions, Fitch has been conducting rating reviews of prime pools over the last several weeks. The extent and rate of the portfolio deterioration associated with many of these transactions has resulted in downgrades for a significant number of subordinate and mezzanine bonds, the rating agency said. Additionally, for the 2005-2007 vintages, the deterioration in the relationship between credit protection and the revised expected loss will cause a sizable portion of the senior classes to be downgraded and/or placed on Rating Watch Negative, as well, Fitch warned.

Why defaults are surging among prime borrowers has less to do with the mortgage instrument, as was the case early in the mortgage crisis, than with more traditional risk factors tied to declining property values and rising unemployment. For example, Fitch said it found that loans with multiple risk attributes such as limited income documentation and second-liens, are defaulting at rates approximately three times that of loans without those characteristics.

Negative equity, too, is a still-emerging problem: borrowers with negative equity in some recent vintage mortgage pools are approaching 50 percent, the rating agency said. Borrowers with no remaining equity are defaulting at a rate three times greater than their equity-holding counterparts.

Write to Paul Jackson at paul.jackson@housingwire.com.

As euphoria over cheap government-sponsored leverage wears off, some investors are beginning to parse through the Treasury's public-private investment plan, and what they're finding has been an all-too-common refrain as of late: more questions than answers. While Treasury secretary Timothy Geithner's toxic asset plan, unveiled Monday morning, provides investors with more detail than previously, it leaves key questions unanswered — particularly on the whole loan side, investors say.

"Who services the loans?" asked one investor, who asked to remain anonymous. His firm specializes in whole loan purchases, and he said his firm is uneasy with the terms spelled out by the Treasury's initial fact sheet. That fact sheet says only that "servicing will be provided by the participant bank, unless otherwise defined," while suggesting that the investment fund "retains control of servicing." Read the full legacy loan fact sheet.

"If I retain responsibility for servicing, I need to control servicing, meaning the loans I purchase come into my shop," said the investor, whose fund maintains its own in-house servicing platform. "If servicing stays with the mega-banks likely to be selling this stuff, I'll have to price accordingly for a lack of control." Whole loan investors say that the return on their investment into distressed residential real estate loans is wholly dependent on the servicing function–and the fact sheet's suggestion that servicing would stay with whatever bank sells the loans via auction has investors concerned.

"Does this mean I need to junk my servicing platform to participate?" asked another investor, whose fund specializes in acquiring sub- and non-performing mortgages. "My return is dependent on a quick assessment of who can be worked with and who can't. None of this bulk loan modification [stuff] you've been reading about–we either get the borrower on the line and work aggressively to cut principal, or we move as fast as possible into foreclosure."

Beyond servicing on whole loans, a reference to "passive" investors in a frequently-asked-questions document has investors worried as well. The document says that executive compensation restrictions will not apply to "passive private investors" in the whole loan purchase program. "The whole loan business isn't about passive investment," said one investor. "Does that mean we're liable for executive compensation restrictions if we try to control servicing?"

Securities investors expressed some disappointment at the Treasury plan's apparent limitation to only certain RMBS, CMBS, and ABS securities; the Treasury said its 'legacy securities' plan will apply to RMBS formerly rated AAA, and CMBS/ABS currently rated AAA. "I dont think you need a lot of leverage to sell AAA rated paper," said one investor. "Maybe you can get a few basis points more with the leverage, but the problem is still to be addressed."

Investors, banks and other financial institutions have only recently begun seeing some downgrades to AAA-rated residential mortgage credits; the vast majority of downgrades and resulting credit hits have been to other tranches in private-party issuances — and the Treasury plan does not include these securities, ostensibly to protect the U.S. taxpayer. But some investors say that such an exclusion leaves plenty of toxic securities on the balance sheets of banks, and doesn't explicitly address collateralized debt obligations, or CDOs.

Treasury officials are managing a series of private calls with key investment groups this week and next, investors told HousingWire, in an effort to better grasp investor concerns around the plan.

Write to Paul Jackson at paul.jackson@housingwire.com.