Administration wants to buy up banks' toxic assets

Struggling to contain the worst financial crisis in seven decades, the Obama administration wants to buy billions of dollars of toxic assets from banks to ease borrowing for consumers and businesses.

Some industry officials familiar with the details said Saturday they expected the approach would try to remove as much as $1 trillion from banks' books. An announcement from Treasury Secretary Timothy Geithner could come as early as Monday.

If banks are not burdened by the soured loans, then they would be in better shape to resume more normal lending.

According to administration and industry officials, the plan would rely on the Federal Reserve and the Federal Deposit Insurance Corp. to supplement the government's $700 billion bailout fund. The uproar over the millions of dollars in bonuses for employees at troubled insurance giant American International Group Inc. has dimmed prospects for getting more bailout money from Congress.

The officials, who spoke on condition of anonymity because the details have not been announced, said Geithner's plan will have three major parts:

_a public-private partnership to back private investors' purchases of bad assets. The $700 billion bailout fund would provide the backing. The government would match private investors dollar for dollar and share any profits equally.

_expanding a recent Fed program that provides loan for investors to buy securities backed by consumer debt. It's an effort to make it easier for people to get auto, student and credit card loans. The Term Asset-Backed Securities Loan Facility (TALF) program is getting up to $100 billion from the bailout fund; that money then is being leveraged to support up to $1 trillion in Fed loans. Under Geithner's plan for the toxic assets, part of that $1 trillion would now go to support purchases of banks' troubled assets.

_using the FDIC, which guarantees bank deposits, to purchase toxic assets. Officials said the agency would create special investment partnerships and then lend them money to buy up troubled assets.

Industry officials said the administration had not disclosed to them the exact amounts of money to be devoted to the effort.

"The key is going to be if the government buys these assets quickly," said Mark Zandi, chief economist at Moody's Economy.com. "The sooner they get these assets off banks' balance sheets, the quicker the system will find its footing and get the economy moving again."

Geithner's announcement last month of the financial rescue overhaul was widely panned by investors. The Dow Jones industrial average plunged by 380 points in large part because investors were disappointed that Geithner did not have more details.

Some analysts worry the market may once again be underwhelmed, in part because not enough resources will be devoted to the problem.

"The market is looking for a `wow' factor where they can see the administration is finally doing enough," said Sung Won Sohn, an economics professor at the Smith School of Business at California State University.

The administration had said in February it needed more time to work out thorny problems that former Treasury Secretary Henry Paulson and the Bush administration had been unable to resolve.

Geithner's new plan is meant to attack what is widely viewed as the major failure of the bailout program so far: the inability to rid banks of a mountain of soured loans and troubled mortgage-backed securities.

Some industry officials said that participation by the private sector may be harmed because potential investors will now be worried that the government will change the terms of the deal or impose new restrictions because of the current political backlash against Wall Street.

Hedge funds and other big investors are likely to be more leery of accepting the government's enticements to purchase these assets, fearing tighter government restraints in such areas as executive compensation.

The effort to deal with toxic assets is the administration's latest initiative to tackle the financial crisis.

Other programs cover mortgage foreclosures; lending to small businesses; unfreezing the markets that support credit card, student loan and auto debt; and testing of the 19 largest banks to ensure they have enough reserves to withstand an even more severe recession.

In addition to unveiling his plan for toxic assets, Geithner, who came under criticism for his handling of the AIG bonus issue, is expected to put forward next week the administration's proposals to overhaul the government's current financial regulatory structure.

President Barack Obama said this past week that this plan will include a proposal to give the administration expanded authority to take control of major troubled institutions that are deemed too big to fail because their collapse would pose a risk to the entire financial system.