WASHINGTON Feb 6 (Reuters) - The Obama administration's eagerly-awaited bank rescue plan will offer to insure some distressed assets held by banks, authorize the government to purchase others, and spend up to $100 billion to buy and modify troubled homeowner mortgages, a source with knowledge of the plan told Reuters on Friday.
U.S. Treasury Secretary Timothy Geithner will detail how the administration plans to use the funds remaining in the government's $700 billion financial bailout program in a speech scheduled for noon (1700 GMT) on Monday.
The so-called Troubled Asset Relief Program (TARP) was created in October to help steady the U.S. financial system, which has been rocked by a plunge in housing prices, steep bank writedowns and an unraveling economy.
Much of the first $350 billion in TARP was used by the Bush administration to inject capital into banks and Detroit automakers in exchange for preferred shares and warrants.
The focus of the next phase of TARP spending has been hotly debated within the Obama administration and by lawmakers.
"One size doesn't fit all," the source said. "The goal here is to speed the resources so that they do the most good for the economy."
The largest portion of the remaining money will be earmarked to offer federal insurance to banks so they can clearly separate, or "ring fence", bad assets that have lost much of their value in recent months, the source said. [ID:nN06446621]
The program will be similar to insurance already offered to Citigroup (C.N) and Bank of America (BAC.N), the source said. TARP is providing insurance on $301 billion of Citi's troubled assets and $118 billion at Bank of America, subject to certain deductibles.
About $50 billion to $100 billion of remaining TARP money will be used to buy distressed mortgages from banks and modify their terms to help homeowners prevent foreclosure, as the administration had promised, the source said.
The remaining TARP money will be used to expand a Federal Reserve lending program which can act as a kind of "bad bank" to mop up toxic assets, the source said. The Treasury had already pledged $20 billion from the first half of the TARP spending for the program, the Term Asset-Backed Loan Facility (TALF).
Under the current TALF program, the Fed vowed to pump up to $200 billion into credit markets with loans that are collateralized by automobile, student, credit card and small business loans, to free up credit. Any losses would be covered by the TARP funding.
More TARP funds would allow the Fed to expand the program to cover a wider range of assets.
"It's been scaled back considerably," the source said, referring to the bad bank concept. The change came after two influential Democrats, Sen. Charles Schumer of New York and U.S. House Speaker Nancy Pelosi, said taxpayer funds should focus on insurance guarantees rather than a bad bank approach.
A government watchdog, special inspector general Neil Barofsky, said on Thursday that the government should be cautious in expanding TALF to mortgage-backed securities that have sunk in value on banks' balance sheets. Anti-fraud measures are crucial before expanding the program, he said in a report to Congress. [ID:nN05358017]
The Obama administration's bank rescue blueprint also reflects plans by Rep. Barney Frank, chairman of the House Financial Services Committee, to seek legislation that would let the Federal Deposit Insurance Corp more than triple its credit line to $100 billion.
Such an increase would give the bank regulator more financial power to handle U.S. bank failures. The FDIC's deposit insurance fund shrank to $34.6 billion in the 2008 third quarter because of a surge in bank failures.
The administration's plan remained fluid on Friday, and was undergoing final tweaks, said Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.
"I think there is a debate within the White House itself about this ... so I'm not sure, they've settled themselves," Dodd told reporters. "Different institutions, different circumstances require a different response." (Writing by Julie Vorman; reporting by John Poirier and Susan Cornwell; Editing by Tim Dobbyn)