SCENARIOS: Obama's menu for U.S. financial stability

(Reuters) - U.S. Treasury Secretary Timothy Geithner on Tuesday will lay out the Obama administration's ideas for tackling the financial crisis and its plans for disbursing what remains in a $700 billion financial bailout fund.

Following are some of the ideas under discussion:

ASSET GUARANTEES

The government is likely to offer banks a sort of insurance policy by guaranteeing against losses on distressed assets that would remain on a bank's books.

Under this plan, assets would be "ring-fenced" from other loans on the bank's balance sheet, which could bolster investor confidence and help the bank raise private capital.

With asset guarantees, the government could leverage taxpayer funds by getting the Federal Reserve or Federal Deposit Insurance Corp to cover a larger amount of assets than the Treasury could buy on its own.

Because of the potential expense of setting up a separate government-run entity, or "bad bank," to hold bad assets -- another widely discussed possibility -- asset guarantees have gained in favor as an option.

The Treasury, the Fed and the FDIC have tailored two major guarantee programs for Citigroup and Bank of America in this manner.

FUNDING FED PROGRAMS

The Treasury is expected to use some of the remaining bailout funds to help the Fed expand a program that has been set up to support consumer and small business lending.

Currently under the program -- the Term Asset-Backed Securities Loan Facility -- the Fed will lend up to $200 billion to holders of AAA-rated asset-backed securities collateralized by auto, student, credit card and small business loans, to try to free up credit. The Treasury pledged $20 billion to cover potential losses the Fed might face.

The Treasury and Fed have said that program could be expanded to cover an array of mortgage-backed securities or other assets, and an expanded program could play a role similar to a "bad bank." An expansion would require the Treasury to pledge more money.

MORTGAGE FORECLOSURE RELIEF

Last month, the White House promised to dedicate between $50 billion and $100 billion of remaining bailout funds to prevent foreclosures.

Officials are considering a plan to have government-controlled mortgage enterprises Fannie Mae and Freddie Mac underwrite failing loans, industry sources said. The government would then give other mortgage companies a subsidy to follow the lead of Fannie Mae and Freddie Mac, the sources said.

The evolving plan would be similar to a proposal that Democrats in Congress had favored to fund a mortgage guarantee program hatched by the FDIC under which the government would insure loans against default.

CAPITAL INJECTIONS

Whatever approach it takes on dealing with toxic assets, the Treasury is likely to continue tapping bailout funds to make investments in banks to shore up their capital.

Bank regulators are still sifting through thousands of applications for government capital under a program set up with the first half of the bailout funds. In addition, non-bank and industrial firms are also trying to line up for cash.

The investment program has been limited to preferred shares and warrants for future common shares at deep discounts.

The government reportedly may begin demanding preferred shares that would convert to common stock after a certain period, perhaps seven years. This would avoid an immediate dilution of shareholders, but the government could end up with large, and perhaps controlling, stakes in some banks if the banks do not recover.

MARK-TO-MARKET ACCOUNTING

Speculation that the plan would include some form of suspension or modification of "mark-to-market" accounting rules, which require banks to recognize losses if their assets fall in value, gave a lift to bank stocks on Thursday.

Senate Banking Committee Chairman Christopher Dodd said on Wednesday it might be possible to modify the rules without "walking away" from the underlying standard. A source told Reuters the Treasury and Securities and Exchange Commission were not discussing suspending the rule.

The rules are at the heart of the conundrum facing banks, because many of the problem assets are illiquid, so a benchmark price is nearly impossible to establish.