Treasury’s toxic asset plan could cost $1 trillion

WASHINGTON (AP) - The Obama administration’s latest attempt to tackle the banking crisis and get loans flowing to families and businesses will create a new government entity, the Public-Private Investment Program, to help purchase as much as $1 trillion in toxic assets on banks’ books.

The new effort, to be unveiled Monday, will be followed the next day with release of the administration’s broad framework for overhauling the financial system to ensure that the current crisis _ the worst in seven decades _ is not repeated.

A key part of that regulatory framework will give the government new resolution authority to take over troubled institutions that would pose a threat to the entire financial system if they failed.

Administration officials believe this new power will save taxpayers money and avoid the type of controversy that erupted last week when insurance giant American International Group paid employees of its troubled financial products unit $165 million in bonuses even though the company had received more than $170 billion in support from the federal government.

Under the new powers being sought by the administration, the treasury secretary could only seize a firm with the agreement of the president and the Federal Reserve.

Once in the equivalent of a conservatorship, the treasury secretary would have the power to limit payments to creditors and to break contracts governing executive compensation, a power that was lacking in the AIG case.

The plan on toxic assets will use the resources of the $700 billion bank bailout fund, the Federal Reserve and the Federal Deposit Insurance Corp.

The initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price.

When Geithner released the initial outlines of the administration’s overhaul of the bank rescue program on Feb. 10, the markets took a nosedive. The Dow Jones industrial average plunged by 380 points as investors expressed disappointment about a lack of details.

Christina Romer, head of the Council of Economic Advisers, said Sunday that it’s important for investors to know that the administration is bringing a full array of programs to confront the problem.

“I don’t think Wall Street is expecting the silver bullet,” she said on CNN’s “State of the Union.” “This is one more piece. It’s a crucial piece to get these toxic assets off, but it is just part of it and there will be more to come.”

But private economists said investors may still have doubts about whether the government has adequate resources to properly fund the plan and whether private investors will be attracted to participate, especially after last week’s uproar concerning the AIG bonuses, which has added to the anti-Wall Street feelings in the country.

Romer said the new toxic asset program would utilize around $100 billion from the $700 billion bailout fund, leaving the fund close to being tapped out.

Mark Zandi, an economist at Moody’s Economy.com, estimated that the government will need an additional $400 billion to adequately deal with the toxic asset problem, seen by many analysts as key to finally resolving the banking crisis.

Zandi said the administration has no choice but to rely heavily on government resources because of the urgency of getting soured real estate loans and troubled asset-backed securities off the books of banks so that they can resume more normal lending to consumers and businesses.

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