With Tuesday's actions, the federal government has extended itself so far into every corner of the financial services sector - investing directly in banks; buying unlimited amounts of commercial paper; and guaranteeing bank debt, interbank funding, and all noninterest-bearing deposits - that many observers said it will involve considerable complexity before it can pull out again.
Even regulators acknowledged that some elements - such as the Federal Deposit Insurance Corp.'s decision to back bank debt - could be particularly difficult to reverse.
"Once you've done it, it's hard to roll back," Comptroller of the Currency John Dugan said in an interview. "If things calm down and there is more confidence, the question is: Will the government fail to step back from the guarantees, or will that act in and of itself create the kind of risk that requires the government to be there in the first place?"
Former regulators, academics, and industry representatives said that although many top officials claim the expanded programs will be targeted and temporary, government intervention in the markets is unlikely to go away anytime soon.
"They don't have a very good exit strategy," said Richard Herring, a professor of international banking at the Wharton School of the University of Pennsylvania. "They've gone in massively, but it's not at all clear how you back away, and that has been the history in all the countries that have tried this out. They make all these guarantees, and there is sort of never quite the right time to remove them."
Individually, many pieces of the plan have deadlines and withdrawal strategies. But observers said the sweeping nature of the intervention left those deadlines in doubt and expressed concerns about whether the strategies would work.
Ultimately, the decision to offer $250 billion of equity stakes to banks and thrifts may be the least complicated decision to undo - though several analysts still raised concerns.
Under the plan, the Treasury Department would take positions in senior preferred stock of selected banks for three years. Then the banks may redeem the Treasury's shares at the whole price, plus any accrued and unpaid dividends. After five years, the Treasury's dividends are to rise to 9%, from 5%, making it more costly for the shares to remain outstanding and encouraging their redemption.
Dugan, for one, said this would work to let the government back away from directly holding stock in institutions.
"On the capital injections, you have a trigger at three years. It becomes less attractive to own the stock as the coupon rate jumps up, and at that moment you can redeem the stock without having to commit to replace it with Tier 1 equity," he said. "That's kind of a natural place for the stock to be redeemed, and people may have an incentive to do so at that time. The stock was designed with those thoughts in mind."
But others were not so sure. Chris Low, the chief economist at First Horizon National Corp.'s FTN Capital Financial, said that, unless private equity is ready to return to the market within three years, the government will not be able to withdraw.
"It depends on how quickly the market recovers," he said. "The assumption is that private capital will follow government capital into the banking system now that investors have been reassured that it's safe, but there's no indication that will be the case."
L. Richard Fischer, a partner in Morrison & Foerster, agreed such a scenario is unlikely and questioned how many years it would take the government to pull back.
"The question is whether it's going to be single digits or more, because it will depend on how long it will take for the market to settle," he said. "You can't really get out of it as easily because we've done all of this in a period of about two months, and it will take far longer to get out."
But analysts see it as even harder for the government to pull back on a guarantee of bank debt. Under the plan, the FDIC will back senior unsecured debt issued between Tuesday and June 30, 2009, for three years. After 30 days, banks must pay a steep premium to participate - 75 cents for every $100 of debt - but the debt would be backed by the government. FDIC officials estimated that roughly $1.4 trillion of debt could be backed by the agency.
The agency also said it would backstop all noninterest-bearing bank accounts - a move that effectively covers most corporate and municipal accounts. (Individual accounts could be covered only if customers agreed not to receive any interest payments). Following a 30-day period of free coverage, banks that participate will face an additional 10-basis-point premium for the backstop. The FDIC has said this coverage would expire at the end of next year.
But many, including Dugan, wondered whether that would be possible. Once investors become used to a government guarantee of bank debt - and unlimited deposit insurance on certain accounts - it may be hard to retrench.
"There's a way to do an exit strategy there ... [but] that may prove to be difficult when we get to that place," Dugan said.
Some former regulators and other analysts agreed.
"It'll be very difficult politically to go back from it," said William Isaac, a former FDIC chairman and now chairman of Secura Group.
Prof. Herring said, "It will be hard for the FDIC to remove the guarantee for business deposits."
"The history of these sorts of guarantees is, there's sort of never a good time to [end] it," he said.
In a conference call with reporters, however, FDIC chairman Sheila Bair disagreed. The agency could devise economic incentives to wean banks off the added coverage and debt guarantees, she said.
"I do see ways of getting out of this - I wouldn't do it if I didn't," she said. "In terms of gradually easing out of this, you can also use economic incentives, increasing the premiums, or ratcheting down the limit. I think there are ways to gradually ease out of this to avoid any kind of too-abrupt, destabilizing impact from having the increases go off right away."
Bair said the goal is to bolster confidence in the system among investors, banks, and consumers. Once this is done, the government can ease back on its role.
"These are temporary measures because we're dealing with a confidence problem, not a structural problem," she said. "We think by reinstilling confidence, getting banks lending again, and people comfortable [with] their banks and their bank deposits again that we'll be able to lift these expansions."
Temporary fixes' becoming permanent was already a hot topic before Tuesday's announcements. Congress raised the deposit insurance limit for all accounts to $250,000 until Dec. 31, 2009 - but analysts universally agree the increase is likely to be permanent.
The government also created a $50 billion insurance fund for money market mutual funds that is meant to be temporary. But most see it as likely to become permanent.
The government also seized Fannie Mae and Freddie Mac on Sept. 7 and said it intends to return the two companies to the private sector within a few years. But few see that happening in such a short time frame either.
"It's going to take quite an extended period of time for the government to disentangle itself from the market," said Michael Barr, a former Treasury official in the Clinton administration, a senior fellow at the Center for American Progress, and a law professor at the University of Michigan. "All parts of the balance sheet have government fingerprints on them ... . The government is as embedded in the balance sheet of all the major financial institutions in our country and it's just going to take years for that to disentangle itself."
John LaFalce, the former top Democrat on the House Financial Services Committee and now counsel in the HoganWillig law firm in Buffalo, agreed.
"I don't think there is an exit strategy at this stage in the game," he said. "They want to stop the bleeding with a tourniquet to deal with the problem now and then they'll come up with an exit strategy as we advance."
It remained unclear what the government might cook up next. Two weeks ago, Treasury Secretary Henry Paulson all but ruled out direct investment in banks - only to reverse himself not long afterward. Though some observers said the government may now have exhausted its options, Bair disagreed.
"We also have, on an institution-by-institution basis, a wide variety of tools that we can use if we need to," she said. "We have a lot in our arsenal. But today's actions are very significant, and I'm hoping we'll get to a stable place where banks will start lending again, and we'll return to normal bank lending activity."
Joe Adler, Emily Flitter, Cheyenne Hopkins, Stacy Kaper, and Steven Sloan contributed to this article.
