By David Lawder

WASHINGTON (Reuters) - The Treasury on Friday said financial institution rescues and asset guarantees similar to those for Citigroup <C.N> will be considered on a case-by-case basis, clearing a broad legal pathway for future bailouts.

In program guidelines required under financial bailout legislation, the Treasury said it will consider targeted investments and asset guarantees for "systemically significant" financial institutions whose destabilization would disrupt markets and weaken the economy.

The Treasury agreed on November 23 to invest another $20 billion in Citigroup preferred stock and help guarantee up to $306 billion in risky assets held by the banking giant in an effort to contain a widening financial crisis.

The Treasury is required by law to draft guidelines for programs it creates under its $700 billion bailout fund, known as the Troubled Asset Relief Program. On Wednesday, it issued guidelines for other automotive company bailouts after it agreed to provide funds to General Motors Corp <GM.N> and Chrysler LLC.

The guidelines give the Treasury broad leeway to step in to bail out other troubled institutions and guarantee big portfolios of illiquid and risky assets that have destroyed market confidence in recent months.

"This underscores the 'too-big-to-fail' doctrine that is in place now," said Gilbert Schwartz, partner at Schwartz & Ballen LLP, in Washington and a former Federal Reserve lawyer. "Given the lack of confidence that people have in financial institutions now, it makes sense to have that policy in place, so that we don't have another situation similar to Lehman's collapse," he added, referring to broker-dealer Lehman Brothers.

He said mid-sized institutions would be unlikely to benefit from the programs, adding: "It will come down to, the bigger the institution is, the more likely it will receive assistance."

Under the Citigroup asset guaranteeprogram, the Treasury agreed to absorb $5 billion in losses after Citigroup takes the first $29 billion in losses and 10 percent of any additional losses. The remainder would be absorbed by the Federal Deposit Insurance Corp and the Federal Reserve.

The Treasury said in the guidelines that the program would be aimed at institutions that face a high risk of losing market confidence "due in large part to a portfolio of distressed or illiquid assets.

"This program would be utilized as needed to improve market confidence in a systemically significant institution and in financial markets broadly and it is not anticipated that the program will be made widely available," the Treasury said.

FUNDING LIMITED-FOR NOW

The Treasury's ability to step in to rescue institutions is currently limited by the availability of rescue funds, as it has now allocated more than the TARP's $350 billion initial tranche. It must ask Congress to access the second $350 billion, and debateover uses of that money will resume next week.

For asset guarantees, the Treasury said in the guidelines that it will collect premiums for assuming specified losses, and the program would be used in cooperation with other government agencies.

The justification for both the asset guarantee and targeted investment programs is "to foster financial market stability and thereby to strengthen the economy and protect American jobs, savings and retirement security," the Treasury said.

It said it would consider the effects an institution's destabilization on creditors and counterparties, on market confidence and on other similarly situated institutions, among other considerations for eligibility.

Analysts said the guidelines attempt to provide more transparency in the bailout process but leave most of the discretion up to the Treasury.

"In general, these rules may give a little more confidence to investors. They're saying they'll swoop in if they need to," said Anton Schutz, president of Mendon Capital in Rochester, New York, which focuses on stocks in the financial sector. "I don't think this gives you any more clarity on how they're going to do bailouts."

(Additional reporting by Jonathan Stempel and Dan Wilchins in New York; Editing by Dan Grebler)

Publié le 02 janvier 2009 Copyright © 2009 Reuters