Obama team works on bank rescue, private money eyed

WASHINGTON (Reuters) - The Obama administration on Monday was nailing down details of a bank rescue plan expected to offer incentives to lure private investors into buying bad debts undermining the financial system and the economy.

U.S. Treasury officials were expected to brief congressional committee staffers on the plan on Monday evening, with Treasury Secretary Timothy Geithner scheduled to outline it publicly at 11 a.m. on Tuesday.

The plan and the administration’s economic stimulus program are pillars of President Barack Obama’s strategy for tackling the deepest U.S. financial crisis since the Great Depression.

A top White House aide said the administration will push private investors to buy compromised mortgage-related assets that are clogging bank balance sheets.

“Government capital is a last resort, and wherever possible, we want to catalyze the private sector to take responsibility for a situation that in many ways was created in the private sector,” National Economic Council Director Lawrence Summers said on CNN.

Financial sector lobbyists said they doubt the Treasury is ready at this point to unveil a plan with the level of detail being sought by much of the banking community and Wall Street.

Major banks and Wall Street want the government to buy distressed assets off their balance sheets, but the administration has struggled with pricing the assets in a way that helps the banks while also being fair to taxpayers.

Summers said on Sunday the administration believes that with the right kinds of government guarantees and financing, the government can bring in “substantial” private capital.

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An announcement on the bank plan had been set for Monday, but was pushed back so the administration could focus its efforts on pushing a huge economic stimulus bill through Congress.

A source familiar with the administration’s thinking said creation of a so-called “bad bank,” financed in part by private equity, was under discussion as a way to take bad assets off banks’ books.

To lure in private investors, the bank could be allowed to issue debt backed by the Federal Deposit Insurance Corp, the source said.

U.S. stock indexes edged down on Monday but bank shares gained on hopes the rescue plan would not dilute current shareholders.

The Treasury is expected to continue to pump capital into banks. A person familiar with the matter said it would likely begin taking preferred stakes that would eventually convert into common equity, buying time for a bank to recover before shareholders are diluted. Currently, the Treasury takes a preferred share and a warrant for common stock.

The plan Geithner is set to outline marks a revamped approach to a $700 billion financial bailout fund approved by Congress last fall.

Officials are not expected to ask immediately for more funds to help rescue the banks, despite signs that future banking sector losses may be huge.

Public opinion has turned against the way the first half of the bailout funds were rushed out to help banks, with little clear impact, and Republicans in Congress have voiced stiff opposition to the size of Obama’s economic stimulus plans.

Treasury Secretary Timothy Geithner speaks to reporters as he sits down to a meeting with the president's working group on the economy, including White House top economic advisor Lawrence Summers and Federal Reserve Chairman Ben Bernanke, at the Treasury Department, February 5, 2009. REUTERS/Jonathan Ernst


But with banks worldwide laid low by huge losses and a scarcity of credit choking the U.S. economy, Geithner was searching for ways to get at the root of the problem -- a mountain of bad debts tied to U.S. mortgages.

Summers said on Monday the president would announce plans to contain damage to the housing sector within two weeks.

Shares in major U.S. banks such as Bank of America and Citigroup have been volatile in recent weeks on speculation about the contents of the plan.

As part of the bailout revamp, the Treasury is expected to offer government guarantees against losses for distressed assets that would remain on banks’ books but that would be separated from the rest of a bank’s portfolio.

Geithner is also expected to announce plans to widen the scope of a Federal Reserve program worth up to $200 billion that seeks to encourage private investors to buy consumer-credit backed debt.

The administration is also designing a mortgage rescue program that would see Fannie Mae and Freddie Mac ease payments for hundreds of thousands of borrowers and offer a model for Wall Street to do the same, sources familiar with the plan said.

Additional reporting by John Poirier, Karey Wutkowski, David Lawder, Glenn Somerville and Mark Felsenthal in Washington and Kristina Cooke in New York; Editing by Andrea Ricci