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Treasury to unveil plan to combat banking crisis

(Agencies)
Updated: 2009-03-23 18:59

WASHINGTON – The Obama administration is hoping it has finally come up with the right formula to resolve the nation's worst banking crisis in 70 years.

US Treasury Secretary Tim Geithner testifies before the Senate Budget Committee at the US Capitol in Washington, DC, in February.  [Agencies]

The program Treasury Secretary Timothy Geithner will unveil Monday seeks to tap the resources of the government's US$700 billion bailout fund, the Federal Reserve and the Federal Deposit Insurance Corp., as well as private investors.

The goal is to buy as much as US$1 trillion in bad assets that are weighing on banks' balance sheets, stifling their ability to resume more normal lending to families and businesses. The loan crunch is depressing economic activity and making the current recession more prolonged and severe.

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Geithner, in an opinion piece in Monday's Wall Street Journal, said the new program aimed to "resolve the crisis as quickly and effectively as possible at the least cost to the taxpayer. ... Simply hoping for banks to work these assets off over time risks prolonging the crisis."

The government has been struggling since the credit crisis hit last fall to figure out a way to sop up the bad assets.

Former Treasury Secretary Henry Paulson never did come up with a solution and the Obama team has been wrestling with the same thorny problems of how to price the assets and make sure the government's resources are up to the task.

The administration is hoping the market reaction to this proposal will be more favorable than Geithner's first effort to overhaul the banking rescue program on Feb. 10, when investors, upset with a lack of detail, sent the Dow Jones industrial average crashing by 380 points.

To encourage investors to be more supportive, the government is offering sizable financial enticements, from shouldering much of the financial risk to providing low-interest loans to purchase the assets.

But the program is coming after a week of Wall Street-bashing in Congress, where lawmakers were outraged with the action by troubled insurance company American International Group Inc. to distribute US$165 million in bonuses after obtaining more than US$170 billion in government bailouts to remain in business.

Some hedge funds and other investors have expressed reluctance to participate in the new program for fear that Congress will subject them to what they view as onerous restrictions on executive compensation.

Administration officials, however, insisted that they believe they have found the right mix to attract private investors and make a dent in what, by some estimates, could be more than US$2 trillion in troubled assets on banks' books.

They said the program has the capacity to purchase US$500 billion and possibly as much as US$1 trillion in troubled loans, which go back to the collapse of the housing boom and the subsequent tidal wave of foreclosures.

But private analysts believe that with the US$700 billion bailout fund nearly tapped out by capital injections to banks and lifelines provided to the auto companies and AIG, there are only enough resources left to get the asset purchase program launched.

Mark Zandi, an economist with Moody's Economy.com, estimated the government will need another US$400 billion to make a sufficient dent in the bad asset problem.

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