- The Washington Times - Saturday, March 21, 2009

WASHINGTON (AP) - The Obama administration, hoping to ease borrowing for families and businesses, has put together a new plan to attack a mountain of toxic assets that are keeping banks from lending more.

The plan, which Treasury Secretary Timothy Geithner could announce as soon as Monday, will employ the resources of the Federal Reserve and the Federal Deposit Insurance Corp., according to administration and industry officials.

These officials, who spoke on background because the details have not yet been made public, said that the administration wants to tap these additional resources to make the government’s $700 billion bailout fund go farther.

The Fed and the FDIC are being tapped for support because the prospects for getting additional money from Congress for the bailout effort have dimmed significantly with this week’s uproar over millions of dollars in bonuses provided to troubled insurance giant American International Group Inc.

The officials said Geithner’s plan will have three major parts. One part will be an effort Geithner spoke about last month _ the creation of a public-private partnership to back purchases of bad assets by private investors.

Officials said that Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up with government funds.

A second part of the plan will expand a recently launched program being run by the Federal Reserve called the Term Asset-Backed Securities Loan Facility, or TALF.

That program is providing loans for investors to buy assets backed by consumer debt in an effort to make it easier for consumers to get auto, student and credit card loans. Under Geithner’s proposal, this program would be expanded to support investors’ purchases of banks’ toxic assets.

The third part of the Geithner plan would utilize the resources of the FDIC, the agency that guarantees bank deposits, to purchase toxic assets. Officials said that the FDIC will create special purpose investment partnerships and then lend those partnerhips money so that they can buy up troubled assets.

When Geithner announced the administration’s overhaul of the troubled financial rescue program on Feb. 10, it was widely panned by investors with the Dow Jones industrial average plunging by 380 points.

Geithner’s new plan on toxic assets would attack what many analysts see as the major failing of the bank rescue effort so far, the failure to rid banks’ of more than $1 trillion in bad loans and other troubled assets weighing down banks’ books. As a result, banks have been unable to shake off the effects of the worst financial crisis to hit the country in seven decades.

While the administration included a placeholder in its budget request last month for as much as an additional $750 billion in rescue funds, more than doubling the current commitment, the uproar over the AIG bonuses has underscored the dim prospects that Congress would vote to bolster the size of the current $700 billion fund.

The effort to deal with toxic assets is the latest in a string of initiatives the administration has put forward to deal with a severe financial crisis that has crimped consumer and business borrowing and deepened a recession that is already the longest in a quarter-century.

The administration’s other programs include efforts to deal with mortgage foreclosures, bolster lending to small businesses, unfreeze the markets that support credit card, student loan and auto debt and begin so-called stress tests of the country’s 19 largest banks to make sure they have sufficient reserves to withstand an even more severe recession.

A major unknown is whether the new plan to deal with toxic assets will succeed in attracting private investors to begin buying banks’ bad assets in markets that essentially have dried up under the weight of billions of dollars in losses.

Hedge funds and other big investors may be even more leery of accepting the government’s enticements to purchase these assets for fear of the imposition of tighter government restraints in such areas as executive compensation in the wake of the uproar over AIG.

In addition to unveiling his plan for toxic assets, Geithner is also expected to put forward next week the administration’s proposals to overhaul the government’s current financial regulatory structure.

President Barack Obama said this week that this plan will include a proposal to give the administration expanded authority to take control of major troubled institutions that are deemed too big to fail because their collapse would pose a risk to the entire financial system.

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