Treasury to Invest in `Healthy' Banks, Kashkari Says

By Rebecca Christie and Robert Schmidt

Oct. 13 (Bloomberg) -- Neel Kashkari, the U.S. Treasury official overseeing the $700 billion rescue of the financial system, said government equity injections will be aimed at ``healthy'' firms.

``We are designing a standardized program to purchase equity in a broad array of financial institutions,'' Kashkari, who heads the department's Troubled Asset Relief Program, said in a speech in Washington. ``The equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions.''

U.S. officials are hurrying to address frozen credit markets that led France, Germany, Spain, the Netherlands and Austria to agree to commit $1.8 trillion to guarantee interbank loans and take equity stakes in banks. Buying shares of financial institutions has become the latest focus of Treasury Secretary Henry Paulson's rescue plan.

``While the U.S. tends to shy away from nationalizing or even partially nationalizing its financial institutions, it would appear that it has no choice but to follow suit,'' Win Thin, a senior currency analyst with Brown Brothers Harriman & Co. in New York, said in a research note today.

Paulson and Federal Reserve officials met today with executives from financial companies to discuss the government plan to restore confidence in credit markets, the Treasury said. The Standard & Poor's 500 Index soared 11.6 percent, the biggest rally in seven decades.

`Multiple Directions'

Kashkari said the Treasury will ``attack'' bad debt clogging financial markets from ``multiple directions.'' His remarks gave the first detailed progress report on the operations of the financial rescue plan since President George W. Bush signed it into law on Oct. 3.

Three firms are finalists to be the Treasury's ``master custodian,'' to be announced in 24 hours to serve as the prime contractor, Kashkari said. The Treasury has tapped law firm Simpson Thacher & Bartlett LLP and investment consultants Chicago-based Ennis Knupp & Associates for roles in the program. More selections are expected in coming days, he said.

``We are working around the clock to make it happen,'' Kashkari told the Institute of International Bankers.

Kashkari, 35, is a former Goldman Sachs vice president who has been one of Paulson's key aides on housing issues since July 2006. He currently serves as an assistant secretary for international economic issues, although his responsibilities have been delegated to another assistant secretary, Clay Lowery, while Kashkari works on the program, called TARP.

Bernanke's Oversight

Paulson has said Kashkari will serve as the interim head of the program while the Treasury searches for a permanent executive. In the speech, Kashkari said Fed Chairman Ben S. Bernanke will lead TARP's oversight board. That panel, which met for the first time last week, also includes Paulson and the heads of the Securities and Exchange Commission, the Federal Housing Finance Agency and the Department of Housing and Urban Development.

In addition to the stock-buying effort, other components of TARP include a whole loan purchase program, a mortgage-backed securities purchase program and an insurance program for those securities.

He outlined three possible scenarios: ``One, an auction purchase of troubled assets; two, a broad equity or direct purchase program; and three, a case of an intervention to prevent the impending failure of a systemically significant institution,'' he said.

Kashkari said the Treasury plans to use its broad powers under the new law. ``Treasury worked hard with Congress to build in this flexibility because the one constant throughout the credit crisis has been its unpredictability,'' he said.

Debt Guarantees

Kashkari did not mention debt guarantees in his speech. Paulson's team also is speeding up consideration of guaranteeing debt issued by banks after a similar move by European policy makers, according to a U.S. official briefed on the matter.

Executive compensation restrictions, required by Congress for participating firms, will take different forms depending on how financial institutions use the program, Kashkari said.

Oversight and compliance efforts already have started, Kashkari said. The Treasury is working with the Government Accountability Office and looking for a special inspector general, as required by the law.

Firms that bid on TARP program jobs will have to disclose and address their potential conflicts of interest, Kashkari said. The Treasury will conduct an independent evaluation before making its financial decision, he said.

Conflicts of Interest

``Taking aggressive steps to manage potential conflicts of interest is essential because firms with the relevant financial expertise may also hold assets that become eligible for sale into the TARP,'' Kashkari said.

The Treasury has received hundreds of applications from firms seeking to be the asset managers for securities and whole loans. For both categories, the Treasury expects to make a selection within the next few days, Kashkari said. Two accounting firms will be selected in coming weeks, he said.

Paulson has tapped an interim leadership team for the rescue program while permanent staff are recruited, Kashkari said, naming five of the new hires.

Reuben Jeffery, undersecretary of State for economic affairs, will be the TARP's chief investment officer. Jeffery spent 18 years at Goldman Sachs.

Jonathan Fiechter, deputy director of the International Monetary Fund's monetary and capital markets director, will be interim chief risk officer for the new program.

Donald Hammond, a former Treasury career official who is now deputy director of the Fed's payments division, will be interim chief compliance officer.

Thomas Bloom, on loan from the Office of the Comptroller of the Currency, will be interim chief financial officer.

Donna Gambrell, head of the Treasury's Community Development Financial Institutions Fund, will lead the program's efforts to preserve homeownership.

To contact the reporter on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net.