Treasury Secretary Timothy Geithner on Feb. 10 laid out details of the Obama Administration's revised bank rescue plan. It includes a program to purchase up to $500 billion in toxic assets on bank balance sheets and up to $1 trillion to support consumer and small business lending.
Geithner, promised "comprehensive and forceful" policy involving a wide range of federal agencies. Addressing a major criticism of previous spending from the $700 billion Troubled Asset Relief Program, or TARP, he promised to impose "higher standards for transparency and accountability." The government has about $350 billion left in the TARP to be deployed.
The stock market, which had been awaiting Geithner's speech and today's approval by the Senate of a stimulus spending plan, sold off after the speech, with some critics noting a dearth of details from Geithner and Treasury, specifically in how bad loans will be valued. The Dow Jones industrial average was down 4.6% at the close.
In his remarks, Geithner said that government needed to get the credit markets moving again. "Instead of catalyzing recovery, the financial system is working against recovery," he said. "And at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it."
Geithner proposed a multipart program:
Banks with assets above $100 billion will be required to undergo a "comprehensive stress test" to assess their ability to keep lending through a severe downturn. The government will provide "capital support for institutions that need it." Geithner said that government investments are designed to be a "bridge to private capital," and said that government infusions should lead to greater bank lending than would have been available without the capital investments. Government investments made under this program will be placed in a separate entity—the Financial Stability Trust—that will be set up to manage the government investments in U.S. financial institutions.
The government, through the FDIC and the Federal Reserve, in partnership with the private sector, will attempt to jump-start a market for troubled real estate assets that are weighing on bank balance sheets. He said the public-private investment fund, which would use government funds to leverage private capital, would initially seek to purchase $500 billion in toxic assets, and could increase that spending to $1 trillion.
"By providing the financing the private markets cannot now provide, this will help start a market for the real estate-related assets that are at the center of this crisis" Geithner said. "Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets." He said the structure of the program was still being worked out.
The government will use approximately $1 trillion to support consumer and small business lending through an expansion of the Term Asset-Backed Securities Loan Facility (TALF). There will be an increase in the federally guaranteed portion of Small Business Administration loans, along with an expedited approval process.
Geithner also promised a "comprehensive plan" to address the foreclosure crisis by bringing down mortgage payments and mortgage rates. He said details of that plan would be developed over the next few weeks.
The Financial Services Roundtable, a trade organization, applauded the public-private aspect of the proposal. "The plan is bold and large enough to address the problem. By helping banks, small business, and consumers, it speeds targeted relief to all sectors of the economy," Steve Bartlett, the group's president, said in a prepared statement.
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Mintz is news editor for BusinessWeek.com in New York.