Treasury to unveil bank rescue bid soon
WASHINGTON (Reuters) - The U.S. government will roll out next week a three-pronged bid to cleanse the U.S. financial system of "toxic" assets clogging banks' balance sheets, a source familiar with the plan said on Saturday.
The plan, a cornerstone of the Obama administration's costly attack on the credit crisis, will aim to attract private investors by offering abundant loans and generous terms.
Its architect, Treasury Secretary Timothy Geithner, is under huge pressure after providing such a scanty outline of the plan last month that bank stocks slumped and triggered fears that some U.S. lenders might be nationalized.
But with fury raging among U.S. lawmakers over bonuses to employees of American International Group when it is receiving huge amounts of bailout money, it is unclear how willing private investors will be to work with the government.
Federal Reserve Chairman Ben Bernanke underlined the critical need to restore stability to the banking system, warning in a television interview last Sunday that he feared political and public will to do so was flagging.
"In which case, we can't count on recovery," he said.
The new plan for cleaning up bank balance sheets is set to come shortly after another big move by the Fed to fight the economic crisis head-on.
The central bank said it would pump more than $1 trillion into the U.S. economy by buying debt, on top of a nearly $800 billion stimulus plan by the Obama administration.
LOTS OF LOANS
The new plan will include setting up an entity to be used by the Federal Deposit Insurance Corp -- the main U.S. banking regulator -- to offer low-interest loans to private interests for buying up banks' soured assets, many of which are tied to mortgages and have tumbled in value, the source said.
Second, the Treasury Department will hire investment managers to run public-private funds to invest for potential profit in troubled mortgages, with government capital matching private capital contributions, according to the source.
Finally, the Federal Reserve will expand its new consumer loan-focused $1 trillion Term Asset-Backed Securities Loan Facility to buy "legacy" assets, the source said.
Legacy assets are older securities, many of them tied to mortgage assets that have plunged in value after housing prices fell and have racked up massive losses for the banking system.
With credit now so tight, the U.S. economy has plunged into a deep and potentially long recession.
The Obama administration plans to contribute between $75 billion and $100 billion in new capital to the effort, although that amount could be expanded, The Wall Street Journal said. Continued...
