Treasury Secretary Timothy F. Geithner on Monday morning revealed some details about a new program to revive lending in the U.S. economy and said that the plan to use around $100 billion taxpayer dollars as leverage to unfreeze credit markets is the government's best option.
"I am very confident this scheme dominates all the alternatives," Mr. Geithner said during a press conference at the Treasury Department that was closed to TV cameras.
President Obama added his voice in support of the plan after a meeting later in the morning with Mr. Geithner, saying that "there is still great fragility in the financial system but we think we are moving in the right direction."
U.S. and world markets responded enthusiastically to the plan, with the Dow Jones Industrial Average jumping 300 points within its first 90 minutes of trading.
Amid concerns that the American public will react angrily to more government spending to help financial institutions, following the furor over AIG bonuses last week, Mr. Geithner acknowledged "deep anger and outrage" across the country, and agreed that there is risk of backlash against the new plan.
"There is no doubt that government is taking risk. You cannot solve a financial crisis without the government taking risk. The only question is how best to do it," he said.
To do nothing would lead to a "longer, deeper recession," and to buy up bad assets entirely with taxpayer dollars would "leave the government more exposed" to losses, the secretary said.
"We are the United States of America. We are not Sweden," Mr. Geithner said, responding to criticisms of the plan by liberal economists such as Paul Krugman.
But the Treasury is pointedly not asking for more funds from Congress and is choosing to use money already approved by lawmakers.
The Treasury's plan is to form partnerships with private investors to purchase up to $1 trillion in toxic mortgage loan assets from ailing banks. The Treasury will spend $75 billion to $100 billion in money from the Troubled Asset Relief Program. Congress approved $700 billion for this fund last fall.
The programs are designed to entice private investors to purchase the souring loans and mortgage securities that have been stifling new lending activity at banks. The programs aim to kick-start the frozen markets for such loans, which have been largely dysfunctional since 2007.
Stock and bond markets have anxiously awaited the Treasury plan, which is considered critical to restore health to the banking sector and credit-starved economy. The Treasury's previous vague outline of the plan in February greatly disappointed markets and helped spur a return of the severe bear market in stocks.
One program outlined by Treasury would be run by the Federal Deposit Insurance Corp. to absorb individual loans that are clogging up banks' balance sheets. The FDIC would provide loans to investors to buy the bank loans, and would guarantee part of the investments. The Treasury would also contribute a small amount of capital for purchase of the loans. Both investors and the government could profit from the deals if the price of the loans increases in future years.
A second program would greatly expand the Federal Reserve's existing program for jump-starting consumer lending markets to also include residential and commercial mortgage loans that have been pooled and securitized. Under that program, the Fed provides financing for investors who purchase securitized bank loans. The Fed program was launched last week.
Under a third program, the Treasury will choose up to five major investment funds that would be charged with raising money from private investors to purchase toxic mortgage assets from banks. The Treasury would match private investments one-for-one, and would also provide loans to augment the size of the investments.
Mr. Geithner, however, did not detail how prices would be determined for assets purchased by the public-private partnership, saying that Treasury would wait to see how the markets react to the plan before nailing down a pricing mechanism.
A significant concern about the program's effectiveness is that financial institutions will avoid taking federal dollars for fear that they will be penalized down the road if they reap large returns on their investments. House passage of a law last week to tax 90 percent of executive compensation, fueled by rage over $165 million in bonuses for AIG executives, has heightened skittishness among investors about taking government money.
The Treasury does not want to impose pay limits on companies that take federal dollars to invest in toxic assets, since it is in their view not a bailout but a risk taken by the financial institution.
Mr. Geithner did not say what his advice to President Obama has been about what to do if the Senate passes the compensation tax law, but he made clear that such a punitive environment would not be helpful to his efforts.
"For these programs to work, investors have to be prepared to take risk. For them to take risk they have to be more confident than they are today that there's going to be a clear set of rules to the game, applied consistently, and of course fairly, going forward," Mr. Geithner said.
"If we are going to get through this we have to engender more confidence in the American people that we're going to use taxpayer money effectively and wisely," Mr. Geithner said. "We want to make sure our assistance is not going to reward failure, to benefit people who got us into this mess."
"We also need to make it clear that our actions need to be guided by the basic objective of doing what is necessary to help get recovery back more quickly," he said. "That requires that we have a better functioning financial system where people are willing to come in and take risk."
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