The new program will use between $75 billion-$100 billion of Treasury funds from the Troubled Asset Relief Program and leverage $500 billion with the potential to expand to $1 trillion of private purchasing power with financing from the Federal Reserve System and the Federal Deposit Insurance Corp.
Using the Fed and the FDIC, the government will leverage private capital by co-investing with the private sector. If the private sector has financing provided by the government, buying these assets becomes a more attractive option.
Second, the administration wants the market, not the government, to set the price for these assets.
"The greatest waste of taxpayer dollars would be us paying too much," an official said.
Third, the private sector will invest alongside the taxpayer on an equal basis, so both parties share the downside risk and upside potential.
To accomplish this, the treasury will partner with the FDIC in a program where banks can bring assets they want to sell to the FDIC. The FDIC will provide leverage, then the assets will be sold in the market, where private market participants will bid on them, thereby setting the price. Then the government can co-invest with the private sector to buy pools of toxic assets and clean up the banks' balance sheets.
To address toxic securities, the treasury will partner with the Fed in a program building on an existing lending program. The Fed will provide leverage for private sector participants to buy securities.
Despite the enormous price tag attached to the program, Geithner said, "Our job is to try to fix this problem in our financial system at least cost to the taxpayer."
"This is not something that shields the private sector from risk," a senior administration official said. "If they do well, we will do well. If we do poorly, they will do poorly as well. So it avoids what's been so wrong in the past where you've had, as the president has said, 'Heads I win. Tails the taxpayer loses.'"
"We have seen and I expect to see a lot of interest from the private sector," Geithner said.
Some investors though might shy away, concerned about a populist revolt.
"There is a fear that if you do well off this, they are going to come after you," said Charles Biderman, CEO of TrimTabs Investment Research, which provides data to investors including many hedge funds. "I wouldn't want to participate with this. I don't want busloads of people coming to my house."
But Joel L. Naroff, president of Naroff Economic Advisors and chief economist for TD Bank, said that investors will participate.
"The question is: how much can they wring from the government to insulate themselves from this," Naroff said. "I don't think they are going to be tarred and feathered if they get involved in a partnership with the government and they make money off of it."
Besides, such profits wouldn't be seen for several years.
"If they are making money off it, it means that the market has moved forward, it means things are getting better and people's focus of attention will have changed," Noraoff said.
House Republican whip Eric Cantor 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."
The administration emphasizes that there is no "silver bullet" to solve this problem.
"This is a large problem that is going to take a long time to solve," a senior administration official said.