Timothy Geithner, President Obama's pick to head the Treasury Department, said Wednesday that the administration is considering setting up a "bad bank" to purchase toxic loans from troubled banks in a new program that could cost taxpayers $3 trillion to $4 trillion.
Mr. Geithner raised the prospect of a "bad bank" at a Senate Finance Committee hearing during which he was questioned about his nonpayment of past taxes and his role in overseeing the recent bailouts of failing Wall Street firms. His nomination appears headed to approval despite the questions.
The administration is under the gun to come up with a solution to remedy bank loan problems as stock indexes approach new lows and major banks such as Citigroup and Wells Fargo sink deeper under the weight of souring loans.
Big banks like these have already received more than $100 billion of assistance from the Treasury's $700 billion bank bailout program, but many Wall Street executives are calling for more, including a program to relieve them of their bad loans.
Mr. Geithner, currently president of the Federal Reserve's New York regional bank, appeared sympathetic to that call. "The good bank/bad bank-type solutions have been present at the solution to most financial crises around the world," he said. "It is possible that something there will be part of the solution going forward."
Morgan Stanley, the investment bank that advised the Treasury on how to structure its bailout program, has recommended that a "bad bank" be seriously considered as the best way to rid banks of their bad loans so they can start lending again.
The Obama administration has not decided what course to pursue and some insiders have said the cost to taxpayers may be prohibitive. Sen. Charles E. Schumer, New York Democrat, disclosed at Wednesday's hearing that a full-fledged bad-bank program could cost between $3 trillion and $4 trillion. He said the idea is attractive but the price tag is so large it would "shake our financial system" and "create great worries for the dollar."
"We want to be careful that ... we're using the taxpayers' money most effectively," Mr. Geithner said. "We want to have the best impact on the financial system with the least potential cost to the taxpayer" and get "the best possible return going forward."
Later, Mr. Geithner said solving the financial problems will "take time" and "require action on a scale that we have not seen in generations."
Despite vigorous questioning from committee members, several said they expect easy approval of Mr. Geithner's nomination.
