New plan to save banks launches

WASHINGTON – The Obama administration launched a new effort Monday to end a paralysis in lending, saying it will team with investors with the goal of buying up to a trillion dollars of bad assets from banks that have been reluctant to make loans to consumers and companies.

In announcing the program, Treasury Secretary Timothy Geithner pleaded for patience, saying that work to rehabilitate an industry with such systemic problems must go forward despite “deep anger and outrage” over executive bonus payments.

Geithner’s performance in President Barack Obama’s Cabinet has come under heavy criticism from some in Congress. The secretary announced the initiative in a Treasury Department room with no cameras allowed.

He was with Obama later in the morning, however, when the president spoke briefly, saying he was “very confident” the latest plan will succeed.

Obama called it “one more critical element” in a multi-pronged effort to revive the economy and said the depressed housing market is beginning to show glimmers of hope.

Sales of previously occupied homes jumped unexpectedly in February by the largest amount in nearly six years, a spike attributed to first-time buyers taking advantage of deep discounts on foreclosures and other distressed properties.

Geithner said the new program will initially seek to harness government and private resources to purchase a half-trillion dollars of bad assets off the balance sheets of banks and said he expects that purchases eventually could grow to $1 trillion.

Treasury officials had no firm forecast on when the government would begin making the asset purchases, although market expectations were that the process could begin within weeks.

“We’re moving as quickly as we can,” Geithner said in an interview on CNBC.
Wall Street seemed to feel rejuvenated. In late afternoon trading, the Dow Jones industrial average was up more than 300 points, quite a difference from the 380-point plunge on Feb. 10 when Geithner unveiled the first version of the administration’s bailout overhaul.

Banking officials praised the outlines of the program and expressed optimism that it will work.

“We are very supportive,” said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. “We think it is a useful tool in the arsenal against liquidity problems.”

The administration’s newest toxic-asset repellant was another in a string of banking initiatives that have included efforts to deal directly with mortgage foreclosures, boost lending to small businesses and thaw out the credit markets for many types of consumer loans.

Administration officials said the plan put forth Monday will deploy $75 billion to $100 billion from the government’s existing $700 billion bailout program for the purchase of bad assets – resources that will be supported by loans from the Federal Deposit Insurance Corp. and a loan facility being operated by the Federal Reserve.

Whereas Geithner suggested there was no alternative to the plan, Republicans said otherwise. House GOP Whip Eric Cantor said he hoped the administration would consider instead an earlier GOP proposal to set up a government-sponsored insurance program for mortgage-related securities.

Cantor, R-Va., called Obama’s plan a “shell game” that hid the true cost.
“As described, the plan seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer,” Cantor said in a statement.

Geithner was scheduled to testify on Tuesday before the House Financial Services Committee.

The secretary defended the decision to have the government carry so much of the risk. He said the alternative would have been to do nothing and risk a more prolonged recession or have the government carry all of the risk.

Geithner also said there would be significant advantages to having private market participants bidding against each other to set prices for which the bad assets will be purchased.

“There is no doubt the government is taking risks,” he told reporters. “You can’t solve a financial crisis without the government taking risks.”