US lays out plan to mop up $500 billion in bad debts


Posted at Feb 11 2009 01:49 AM | Updated as of Feb 11 2009 07:09 PM

WASHINGTON - The US Treasury on Tuesday unveiled a revamped financial rescue plan to cleanse $500 billion in spoiled assets from banks' books and support $1 trillion in new lending through an expanded Federal Reserve program.

The renamed "Financial Stability Plan," rolled out by Treasury Secretary Timothy Geithner at the Treasury, will also devote $50 billion in federal rescue funds to try to stem home foreclosures and soften the crushing impact of the deep housing crisis now afflicting the entire economy.

The Treasury said a public-private investment fund will be established, seeded with government money, to leverage private capital so that so-called toxic assets can be sponged out of the faltering banking system. The hope is that that will enable banks to resume lending.

The public-private investment fund would start at $500 billion but could expand to up to $1 trillion in financing capacity, Geithner said in a speech.

After Geithner's announcement, stock prices fell further and the dollar extended losses while prices for US Treasury debt securities extended gains.

James Ellman, President of Seacliff Capital in San Francisco, said: "Investors want clarity, simplicity, and resolution. This plan is seen as convoluted, obfuscating, and clouded."

Geithner acknowledged deep skepticism has developed over the fairness and efficiency of a $700-billion bank bailout program approved by Congress in October. He said leaders of some financial institutions that have received money had squandered the good faith that is needed to make the bank rescue effective.

"The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust," Geithner said.

The revamped approach to the government's financial rescue war chest would use $100 billion to cover risks the Fed would take in expanding a $200 billion program supporting consumer and small business lending to a $1 trillion program that also supports an array of mortgage-related assets.

Markets appeared caught off balance by some of the measures that Geithner offered.

"Just a day ago, they were talking about good bank and bad bank. Now they come up with something completely new," said Robert Brusca, chief economist for Fact and Opinion Economics in New York. "I'm not sure how this public/private thing will work."

President Barack Obama told a news conference on Monday that cleaning up banks' balance sheets was a priority and didn't rule out the possibility that it will take more money than the $700 billion Congress already has approved to complete the job.

"We don't know yet whether we're going to need additional money or how much additional money we'll need until we see how successful we are at restoring a level of confidence in the marketplace," Obama said.