- The Washington Times - Tuesday, March 24, 2009

The Obama administration on Monday offered its most significant initiative to date to revive bank lending and the economy, calling on private investors to join with the Treasury in buying up to $1 trillion in the toxic mortgage debt at ailing banks. The move helped ignite a powerful rally on Wall Street.

Treasury Secretary Timothy F. Geithner said he will try to parlay $100 billion in cash and several times that in government loans into a winning investment for taxpayers, although he acknowledged that the program is “risky” and may not succeed at enticing private investors such as hedge funds into purchasing the toxic loans.

But he said the program is the “best option” for taxpayers because it potentially costs less than a full-scale bailout of the banks.

President Obama said the financial system remains fragile and struggling banks must be freed from the souring debt to get “this economy moving again.” He said the Treasury plan will help get loans to families for cars and education and to small businesses to stay afloat.

U.S. and world markets responded enthusiastically to the plan. The Dow Jones Industrial Average shot up 300 points within the first 90 minutes of trading and ended the day up by almost 500 points, at 7,775, an increase of almost 6 percent. European indexes rose by an average of about 3 percent.

French Prime Minister Francois Fillon said his government was “reassured” by Mr. Geithner’s plan. At one point, he said, France feared that the Obama administration would “totally absorb … all the toxic assets” through a “bad bank” system.

Mr. Fillon, who had lunch with Lawrence H. Summers, the head of Mr. Obama’s National Economic Council, and also met with Vice President Joseph R. Biden Jr., said the U.S. plan “will lead all European countries to think about similar systems.”

Republicans, however, voiced serious reservations about the administration’s plan.

House Minority Whip Eric Cantor, Virginia Republican, called the plan “a shell game that hides the true cost of the program from the taxpayers that will be asked to pay for it,” arguing that involvement by the Fed and FDIC makes the taxpayer’s exposure larger than the Obama administration first indicated.

“The plan seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer,” Mr. Cantor said in a statement.

The rollout of the plan was anticipated after the negative market reaction last month to Mr. Geithner’s initial presentation, which was short on detail and unconvincing to investors. In addition, the scandal over $165 million in bonuses for executives at troubled insurance giant American International Group Inc. created what Mr. Geithner said is “a very challenging environment.”

Mr. Geithner acknowledged “deep anger and outrage” across the country. But doing nothing, he said, 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 who say the government should just take over the banks and nationalize them.

The $75 billion to $100 billion from the Treasury will come out of the Troubled Asset Relief Program. Congress approved $700 billion for this fund last fall. It has three main components:

• One program 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 also would 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 expand the Federal Reserve’s program for jump-starting consumer lending markets to 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 dollar for dollar and would provide loans to augment the investments.

Republicans said the plan required taxpayers to assume an enormous risk without an equal share of the returns. It offers government loans to pay for 85 percent of bad assets and then matches private investor funds dollar for dollar to make up the remaining 15 percent.

“While private investors hold the key to economic recovery, asking hardworking taxpayers to foot 90 percent of the bill is not what the American people would call a fair partnership,” said Republican Study Committee Chairman Tom Price of Georgia

Mr. Summers said that “taxpayers will not lose a penny until the private investors have lost 100 percent of their investment.”

“If there are substantial profits, taxpayers will share in them 50-50,” he said during an interview with “The Newshour with Jim Lehrer.” “This program is very carefully designed to protect taxpayer interests.”

The spike in trading, Mr. Summers said, showed that Wall Street saw incentives for investing in the plan.

A significant concern about the program’s effectiveness, however, 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 bill last week to tax 90 percent of executive compensation, fueled by rage over the AIG executive bonuses, 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 because it is considered a risk taken by the financial institution rather than a bailout.

Mr. Geithner did not say what his advice to Mr. 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.

White House press secretary Robert Gibbs was noncommittal when asked whether Mr. Obama opposed the AIG penalties bill or would veto it.

Mr. Obama also appointed three top Treasury officials to help Mr. Geithner, one day after taking blame for not moving quickly enough to do so. Mr. Obama named Neal S. Wolin, a former Clinton administration Treasury official, as deputy secretary, and Lael Brainard, who worked in the Clinton White House, as undersecretary for international affairs.

The president also announced that he plans to retain Stuart A. Levey as undersecretary for terrorism and financial intelligence. Mr. Levey was appointed by President George W. Bush and has used his post to crack down on Iranian businesses in an attempt to penalize Tehran for its nuclear program.

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