Detailed toxic asset strategy due soon
Treasury Secretary Timothy F. Geithner could announce as soon as Monday his much-anticipated plan to get toxic assets off the books of the country’s struggling banks, administration and industry officials said.
The plan will use the Federal Reserve and the Federal Deposit Insurance Corp. to make the resources of the government’s $700-billion financial rescue fund go further, the officials said Friday.
Geithner is being forced to tap the Fed and the FDIC for support because the prospects for getting additional money from Congress for the bailout effort have dimmed significantly given the recent uproar over millions of dollars in bonuses handed out by troubled insurance giant American International Group Inc., the largest recipient of government support.
The officials, who spoke on condition of anonymity because they were not authorized to speak publicly about Geithner’s plan, said it would have three major parts:
One program will use the bailout fund to create a public-private partnership to back purchases of bad assets by private investors.
A second portion of the plan will expand a recently launched program being run by the Federal Reserve called the Term Asset-Backed Securities Loan Facility, or TALF. That program is providing loans for investors to buy assets backed by consumer debt in an effort to make it easier for consumers to get auto, student and credit card loans. Under Geithner’s proposal, this program would be expanded to support investors’ purchases of banks’ toxic assets.
The third part of the Geithner plan would use the resources of the FDIC, the agency that guarantees bank deposits, to purchase toxic assets.
When Geithner announced the administration’s overhaul of the financial rescue program on Feb. 10, he mentioned only using the bailout funds to support the private-public partnership, and he was vague on the details of how that program would work.
The initial proposal was widely panned by investors, who were disappointed by a lack of specifics. The Dow Jones industrial average tumbled 380 points on the day the original program was announced.
The effort to deal with more than $1 trillion in toxic assets is the latest in a string of initiatives the administration has put forward to deal with the financial crisis that has made it hard for consumers and businesses to get loans and has deepened the recession, already the longest in a quarter of a century.
The administration has put forward new programs to deal with mortgage foreclosures, expanded efforts to bolster lending to small businesses, launched with the Fed the TALF to unfreeze markets that support credit card, auto and student loans and also begun a so-called stress test of the country’s 19 largest banks to make sure they have sufficient resources to withstand an even more severe recession.
A key unknown is whether the new plan to deal with toxic assets will succeed in attracting private investors to start buying the bad assets. Investors have fled those markets, scared off by the billions of dollars of losses that have already been incurred.
Hedge funds and other big investors may be even more leery of accepting the government’s enticements to purchase such assets for fear of the imposition of tighter government restraints in such areas as executive compensation in the wake of the AIG uproar.
