Barack Obama, Bank Bailout

OBAMA FOR USA. In contrast to its aggressive and activist role in reshaping the car industry, the Obama administration took a more cautious approach to a far larger task confronting it -- stabilizing the shell-shocked financial industry so credit could begin flowing again.

To the consternation of many of his liberal supporters, President Obama has resolutely steered clear of any suggestion that he nationalize large ailing banks, an approach that his aides have argued would create more problems than it would solve. Instead, he turned to Treasury Secretary Timothy F. Geithner, who developed a plan that seeks to combine federal funds and private investment to strengthen banks by purchasing their most dubious assets, the mortgage-backed securities that have been deflated by the collapse of the housing bubble.

On March 23, Mr. Geithner laid out the details of his plan, which centers on an entity called the Public-Private Investment Program, whose goal is to provide financing for $500 billion in purchasing power to buy those toxic assets, with the potential of expanding later to as much as $1 trillion.

The PPIP is to be financed with $75 billion to $100 billion in capital from the existing financial bailout known as TARP (for Troubled Asset Relief Program), along with the share provided by private investors, which the government hopes will come to 5 percent or more. That money would be leveraged by combining it with large loans from the Federal Deposit Insurance Corporation and the Federal Reserve. The private investors would be subsidized but could stand to lose their investments, while the taxpayers could share in prospective profits as the assets are eventually sold.

Mr. Geithner also set in motion a set of so-called stress tests for the nation's largest banks, which examined bank assets and how they might fare under a variety of scenarios for the economic downturn. He said that the results would be used to determine which banks were in need of more capital.

The Treasury plans unfolded against a background of deep public anger over the federal bailouts begun under Mr. Bush. That anger spiked in March when it was revealed that the giant international insurer American International Group, which had already received $150 billion in taxpayer funds, had paid $165 million in bonuses. Mr. Obama ordered the Treasury to seek to recover the bonus money, but he and Mr. Geithner faced criticism for not having blocked them. In the end, the bulk of the bonuses were voluntarily returned, spurred by AIG's president and public reaction.

The Obama administration marked with little fanfare a major milestone in its bank rescue effort -- its decision on June 9 to let 10 big banks repay federal aid that had sustained them through the worst of the crisis -- as policy makers and industry executives focused on the challenges still before them.

"This is not a sign that our troubles are over," President Obama said. "Far from it."

While the announcement had been expected for weeks, the official word put the administration's imprimatur on a corps of big banks considered healthy enough to extricate themselves from Washington's grip.

The bank holding companies, among them American Express, Goldman Sachs, JPMorgan Chase and Morgan Stanley, plan to return a combined $68.3 billion. That represents more than a quarter of the federal bailout money that the nation's banks have received since last October.

But the decision to allow the banks to exit the TARP also ushered in a new, and potentially risky, phase of the banking crisis. Letting the lenders out now -- earlier than many had envisioned, and without the industry reforms some consider necessary to prevent future crises -- raises many sobering questions for policy makers, bankers and taxpayers.

The program was aimed at purchasing assets and equity from banks to strengthen them and encourage them to expand lending during a tightening credit squeeze. But after banks return the TARP money, the administration will forfeit much of its leverage over them. With that loss goes a rare opportunity to overhaul the industry. The administration's ability to push institutions to purge themselves quickly of bad assets and do more to help hard-pressed homeowners will be diminished.

On June 10, the Obama administration appointed a compensation overseer with broad discretion to set the pay for 175 top executives at seven of the nation's largest companies, which have received hundreds of billions of dollars in federal assistance to survive.

The mandate given to the new compensation official, Kenneth R. Feinberg, a well-known Washington lawyer, reflects the federal government's increasingly intrusive role in the corporate affairs of deeply troubled companies. From his nondescript office in Room 1310 of the Treasury building, Mr. Feinberg will set the salaries and bonuses of some of the top financiers and industrialists in America, including Kenneth D. Lewis, the chief executive of Bank of America; Vikram S. Pandit, the head of Citigroup, and Fritz Henderson, the chief executive of General Motors.

The compensation of executives at some companies receiving aid provoked a firestorm of political outrage earlier in the year. In revising a previous proposal to set pay limits, the administration has decided to take an approach that will leave the success or failure of the effort to curtail high compensation at the assisted companies in the hands of Mr. Feinberg. (Mr. Feinberg himself will not receive any government compensation.)