The U.S. Treasury pledged Monday to commit $75 billion to $100 billion of its financial bailout fund to soak up distressed assets now choking bank balance sheets.
Financial stocks jumped on the news, helping send U.S. stock futures sharply higher. Citigroup stock rose 20% to $3.15 a share and Bank of America rose 17% to $7.25.
Treasury Secretary Timothy Geithner's banking plan will use low-interest loans and between $75 billion to $100 billion of what's left of the government's $700 billion bailout fund to entice private sector investors to initially buy about buy $500 billion in toxic assets — taking them off the books of the nation's banks.
The administration also said the initial effort could grow to $1 trillion, as the program proves successful in attacking the problem that has stifled bank lending to consumers and business, compounding the global economic downturn.
In its lengthy fact sheet, the administration says it expects a broad array of private sources, from pension funds to insurance companies and other long-term investors to bid for the distressed assets.
The Federal Reserve, which is the U.S. central bank, and the Federal Deposit Insurance Corp., an independent agency of the government that backs bank deposits, will have large roles in financing the deals.
Geithner wrote in Monday's Wall Street Journal that the new bank program aims to "resolve the crisis as quickly and effectively as possible at the least cost to the taxpayer. ... Simply hoping for banks to work these assets off over time risks prolonging the crisis."
The government has been struggling since the credit crisis hit last fall to find a way to sop up the bad assets.
The Geithner banking plan is designed to resolve the vexing problems of how to price the bad bank assets while showing the government has sufficient capital to make a difference.
So far, market reaction to this proposal is more favorable than Geithner's initial broad outline for the overhaul on Feb. 10, when investors, upset with a lack of detail, sent the Dow Jones industrial average tumbling.
To encourage investors to be more supportive, the government is offering sizable financial enticements, from shouldering much of the financial risk to providing low-interest loans to buy the assets.
After the outcry over bonus payments to some employees at government-rescued insurer AIG, some hedge funds and other investors have expressed reluctance to participate in the new program for fear that Congress will subject them to what they view as onerous scrutiny of their operations.
Administration officials, however, insist they have found the right mix to attract private investors and make a dent in what, by some estimates, could be more than $2 trillion in troubled assets on banks' books.
They say the program has the capacity to buy as much as $1 trillion in troubled loans, which go back to the collapse of the housing boom and the subsequent tidal wave of foreclosures.
But private analysts believe that with the $700 billion bailout fund nearly tapped out by capital injections to banks and lifelines provided to the auto companies and AIG, there are only enough resources left to get the asset purchase program launched.
Mark Zandi, an economist with Moody's Economy.com, estimates the government will need another $400 billion to make a sufficient dent in the bad asset problem.
Administration officials say they want to get the new program launched and see how successful it is before deciding whether to ask Congress for more money.
The administration included a placeholder in its budget request to Congress last month for an additional $750 billion, more than doubling the financial rescue effort, but many lawmakers have said the current bailout fatigue among voters dims the prospect of getting further resources.
First Trust Advisors chief economist Brian Wesbury said markets have been rising the past few weeks partly on expectations of a government plan to remove the bad assets from banks.
"If their proposal is seen as weak or inefficient or unworkable, then we could lose what we've gained pretty quickly," he says.
Under part of the program, investors will borrow government funds that they will supplement with their own money. The investors will then buy the toxic assets, which include loans and securities, many tied to subprime mortgages, for which there currently is no market and which are clogging banks' balance sheets and restricting lending.
Investors will compete for the government loans in auctions, which will set the interest rate for the loans.
Geithner's announcement comes amid public furor that firms such as AIG that have received taxpayer money have been paying bonuses. A movement is underway in Congress to tax bonuses given by firms receiving government aid.
"People want to participate if there's a business reason," White House economic adviser Austan Goolsbee said on CBS's Face the Nation. Firms in the program will "be treated totally differently than … AIG or Fannie Mae, where they are only in business because the government saved them."