Washington - The Obama administration on Monday launched its much-awaited assault on the worst US banking crisis in 70 years and a credit freeze that is pushing the economy ever deeper into recession.
Treasury Secretary Timothy Geithner's banking plan will use low-interest loans and between $75bn to $100bn of what's left of the government's $700bn bailout fund to entice private sector investors to initially buy about buy $500bn in toxic assets - taking them off the books of the nation's banks.
The administration also said the initial effort could grow to $1 trillion, as the programme proves successful in attacking the problem that has stifled bank lending to consumers and business, compounding the worsening global downturn.
In a lengthy fact sheet, the administration said it expects participation from a broad array of private sources, ranging from pension funds to insurance companies and other long-term investors.
The Federal Reserve, which is the US central bank, and the Federal Deposit Insurance Corp, an independent agency of the government that backs bank deposits, will have large roles in putting up the needed cash.
But the programme may face stiff resistance as it debuts after a week of Wall Street-bashing in Congress, where lawmakers were outraged over troubled insurance company American International Group paying $165m in bonuses after taking more than $170bn in government bailouts to stay afloat.
Markets climb
President Barack Obama, who expressed outrage over the payouts, has, nevertheless signalled, opposition to a quickly passed House of Representatives measure to tax such bonuses at 90%. In a CBS television interview broadcast on Sunday he questioned the bill on constitutional grounds.
Geithner, meanwhile, wrote in Monday's Wall Street Journal that the new bank programme aimed to "resolve the crisis as quickly and effectively as possible at the least cost to the taxpayer. ... Simply hoping for banks to work these assets off over time risks prolonging the crisis."
The government has been struggling since the credit crisis hit last fall to find a way to sop up the bad assets.
The Geithner banking plan was designed to resolve the vexing problems of how to price the bad bank assets while showing the government has sufficient capital to make a difference.
The administration hopes the market reaction to this proposal proves more favourable than Geithner's initial broad outline for the overhaul on February 10, when investors, upset with a lack of detail, sent the Dow Jones industrial average tumbling that day.
European and Asian markets climbed auspiciously ahead of Monday's announcement and Wall Street futures pointed to a sharply higher open.
To encourage investors to be more supportive, the government is offering sizable financial enticements, from shouldering much of the financial risk to providing low-interest loans to purchase the assets.
Limited resources
Some hedge funds and other investors have expressed reluctance to participate in the new programme for fear that Congress will subject them to what they view as onerous restrictions on executive compensation.
Administration officials, however, insisted that they believe they have found the right mix to attract private investors and make a dent in what, by some estimates, could be more than $2 trillion in troubled assets on banks' books.
They said the programme has the capacity to purchase $500bn and possibly as much as $1 trillion in troubled loans, which go back to the collapse of the housing boom and the subsequent tidal wave of foreclosures.
But private analysts believe that with the $700bn bailout fund nearly tapped out by capital injections to banks and lifelines provided to the auto companies and AIG, there are only enough resources left to get the asset purchase programme launched.
Mark Zandi, an economist with Moody's Economy.com, estimated the government will need another $400bn to make a sufficient dent in the bad asset problem.
Administration officials said they want to get the new programme launched and see how successful it is before deciding whether to ask Congress for more resources.
The administration included a placeholder in its budget request to Congress last month for an additional $750bn, more than doubling the financial rescue effort, but many lawmakers have said the current bailout fatigue among voters dims the prospect of getting further resources.
- AP