U.S. Treasury Secretary Timothy Geithner will lay out a bank-rescue plan on Tuesday that will rely on public and private funds to take $500 billion of bad assets off banks' books, sources said.
The plan would also extend a Federal Reserve program aimed at shoring up consumer lending to the troubled mortgage sector, allowing the U.S. central bank to extend up to $1 trillion in loans to holders of a wide variety of asset-backed securities, according to sources.
Details on Geithner's proposal for stabilizing a U.S. financial sector decimated by soaring losses on mortgage-related debts emerged following briefings Treasury officials provided for Capitol Hill lawmakers.
President Barack Obama told a news conference on Monday that cleaning up banks' balance sheets was a priority and didn't rule out the possibility that it will take more money than the $700 billion Congress already has approved to complete the job.
"We don't know yet whether we're going to need additional money or how much additional money we'll need until we see how successful we are at restoring a level of confidence in the marketplace," Obama said.
Clearly aware that shaky global financial markets are intently watching what steps Washington will take to right the world's largest economy, Obama called on Congress to speedily approve an economic stimulus package to complement the revamped bank-rescue proposals that Geithner was to unveil.
"If you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of," Obama said. "This is not your ordinary, run-of-the-mill recession, we are going through the worst economic crisis since the Great Depression."
Geithner will outline the Obama administration's plan to revamp a U.S. financial bailout program that his predecessor, Hank Paulson, persuaded Congress to approve last year. About half of that money has been committed to pump capital into banks and ailing U.S. automakers.
Industry sources said capital injections will continue under Geithner's plan, but the Treasury is expected to ask banks to show how the money they receive is leading to more lending.
Geithner will also announce an expansion of a joint Treasury-Fed program currently aimed at stimulating consumer and small business loans by allowing it to extend loans with commercial mortgage-backed securities and private label mortgage securities as collateral, sources said.
The program currently allows the Fed to loan up to $200 billion dollars to holders of top-rated securities backed by credit car, education, auto and small business loans. That program would be expanded to $1 trillion, sources familiar with the plan said.
Treasury also is expected to announce $50 billion aimed at stemming home foreclosures, several sources said. On Monday the director of the White House National Economic Council, Lawrence Summers, said on CNN more measures to help the battered housing sector will be coming within about two weeks.
In recent days, as Treasury worked to finalize details of its rescue package, attention has shifted to how to draw in private-sector investment to help clean up balance sheets littered with growing numbers of non-performing assets.
Summers said the administration wants private investors to be more active in buying compromised mortgage assets that are clogging bank balance sheets.
RESTORING CREDIT
Soaring defaults on U.S. mortgages have led to deep losses at banks worldwide, leading them to cut off lending and undercutting the global economy. The United States has been stuck in a recession for more than a year, and appears on a steepening slope downward.
In effect, having a combination of public and private investment to take bad assets from banks would have the same impact as setting up a government-run "bad bank," an option that had been under consideration, and would be more cost-effective than a stand-alone bank.
"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," Summers said on CNN.
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. The Senate is set to vote on the stimulus proposals later on Tuesday.
While Treasury will keep pumping capital into banks, it also is expected to introduce more rigorous stress-testing of lenders. Banks deal with different regulators, but sources said those regulators will agree on common standards for testing so that markets can have confidence they are safe and sound.
Sources have said the administration is also working on a mortgage rescue program under which government-controlled mortgage enterprises Fannie Mae and Freddie Mac would ease payments for hundreds of thousands of borrowers and offer a model for Wall Street to do the same.
