The Obama administration unveiled its long-awaited bank rescue plan Tuesday but did not spell out how it would resolve the most critical issue on Wall Street - how to dispose of unsellable debts - provoking widespread disappointment that sent the Dow Jones Industrial Average plummeting nearly 400 points.
The goal of the program is to dramatically widen aid for banks and credit markets, using $300 billion from the Treasury’s remaining bank bailout funds to try to leverage as much as $2 trillion in funding from private markets and the Federal Reserve as the way to return the financial system to health.
But the most critical element of the plan - to create a fund that would purchase and dispose of trillions of dollars of souring loans on bank books using a combination of federal and private funds - was offered in only two vague paragraphs that gave little hint as to how the program would work and provoked massive skepticism on Wall Street.
Major stock indexes lost nearly 5 percent of their value, the Dow fell back below 8,000 to end at 7,888.88, and bank stocks that were supposed to be helped by the plan plummeted by 14 percent on average in the worst market drubbing since the day President Obama took office.
“This was not ready for prime time. Someone miscalculated,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “Wall Street was expecting a specific plan, and we didn’t get it. … There were no specifics, such as guarantees from the government that those toxic assets will not fall to a lower value.”
Through weeks of buildup to the Tuesday announcement, including dire warnings from Mr. Obama about how the financial rescue was needed to avert economic disaster, the administration had led not only Wall Street but also many in Congress and on Main Street to believe it would offer a comprehensive and credible plan to solve the bad loan problem.
“This is the most important program of all, and it’s surprising that they haven’t gotten their act together,” Mr. Baumohl said.
“The Obama administration’s failure to deliver on its promise of a detailed, coherent rescue plan squandered precious market confidence,” said Dwight Cass, analyst at Breakingviews.com. “That will be hard to rebuild.”
Treasury Secretary Timothy F. Geithner said the department is still reviewing a “range of options” to leverage an estimated $200 billion or less of uncommitted bailout funds through a mechanism that would take potentially trillions of dollars of bad loans off bank books. But many Wall Street executives are hard put to understand how such a program would work, because private investors to date have been unwilling to pay anything more than pennies on the dollar for such loans.
Confronted with Wall Street’s bad reaction, Mr. Geithner told Bloomberg News: “This is very complicated to get it right. … We are going to try to get it right before we give the details so that we don’t add further to uncertainty in these markets.”
In an ABC “Nightline” interview broadcast Tuesday night, Mr. Obama accused Wall Street executives of creating the problem and then sitting back and expecting the government to solve it for them.
“Wall Street, I think, is hoping for an easy out on this thing and there is no easy out,” he said.
Besides leaving details of the so-called “bad bank” program to the imagination, the Treasury announcement also did not detail how it would use $50 billion of the bailout funds to limit home foreclosures, although the administration had telegraphed in advance that it would take a week or more to complete that part of the plan.
The most concrete program the Treasury offered Tuesday was to use $100 billion of the remaining bailout funds to greatly expand the Fed’s efforts to revive collapsed securities markets for consumer and business loans. The Fed would leverage the Treasury funds to purchase as much as $1 trillion of securitized loans under a program established by the Bush administration. The program would be expanded to include, for the first time, commercial real estate loans to try to avert a developing crisis in that area.
The plan also stepped up help for small businesses, which would receive more generous terms and beefed-up assistance on loans guaranteed by the Small Business Administration.
As a prelude to giving more capital infusions and other assistance to banks, the Treasury said it will subject banks to rigorous financial “stress tests” to determine their health. That process is expected to accelerate the closure of many small banks while providing the Treasury with the information it needs to address toxic loan problems at money-center banks that it has deemed too big to fail.
“Without credit, economies cannot grow at their potential, and right now, critical parts of our financial system are damaged,” Mr. Geithner said.
The Treasury secretary conceded that much of the plan is experimental and the administration will have to try new tactics as well as possibly ask Congress for more money if it does not succeed at reviving the banking system and credit markets.
Mr. Geithner pleaded with the public and Congress to recognize that by helping banks and credit markets, the Treasury is doing what is necessary to promote a recovery from deep recession that will help to restore 3.6 million jobs that have been lost in the past year.
“Instead of catalyzing recovery, the financial system is working against recovery. And at the same time, the recession is putting greater pressure on banks,” he said. “This is a dangerous dynamic, and we need to arrest it.”
Federal Reserve Chairman Ben S. Bernanke said gaining the public’s support for the banking program is critical, and he also called on legislators to explain to their constituents why it is necessary. He told the House Financial Services Committee Tuesday that public opposition to bank bailouts is a major reason why Japan failed to address its banking problems in the 1990s and a banking crisis turned into a decade-long recession.
“It’s not easy to bring the public along to address the banking system. That was big problem in Japan,” Mr. Bernanke said, adding that he personally finds it objectionable to have to bail out many of the large banks that created the bad loan problems. But he said he must do so because their failure would cause massive disruptions in the financial system that would hurt everyone.
“That’s not a business we want to be in,” he said of big bank rescues. “A lot of the steps that are taken, as distasteful as they are, had to be taken” to prevent an even deeper economic downturn.
“We’re better off the addressing our problems rather than letting them fester,” as Japan did.
• Richard Gross contributed to this report.