New Treasury plan aims to trigger $1 trillion in lending

WASHINGTON -- Treasury Secretary Timothy Geithner today unveiled a sweeping plan to shore up the financial system that could deliver more than $1 trillion as the government works with the private sector to buy troubled assets from lenders, make bank capital injections and expand a Fed lending program.

Treasury wants to use federal funds as seed money to induce the private sector to buy bad assets. The government will create a public-private entity that could buy up to $500 billion in toxic assets. The government could also absorb, or guarantee, part of the losses from bad assets held by financial firms.

The renamed "Financial Stability Plan," rolled out by Geithner, will also use at least $50 billion of the remaining $350 billion from last year's financial rescue law to help prevent home foreclosures. Details of that plan will be announced "in the next few weeks," Geithner said.

The administration will also use $100 billion to expand a recently-created $200 billion Federal Reserve program. That program, designed to bolster lending for student loans, credit cards and auto loans, will also cover bonds backed by commercial real estate and privately issued mortgage-backed securities. The new funding is designed to leverage hundreds of billions of additional activity under the Fed program.

Banks could receive more capital under the plan, which will be funded from the remaining $350 billion of last year's $700 billion financial rescue plan. But to get aid, banks would be subject to beefed up supervision or stress testing, especially big banks.

Here's how Geithner laid out three key elements of the plan Tuesday:

• "First, we're going to require banking institutions to go through a carefully designed comprehensive stress test ... We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it...

"Those institutions that need additional capital will be able to access a new funding mechanism that uses funds from the Treasury as a bridge to private capital. The capital will come with conditions to help ensure that every dollar of assistance is used to generate a level of lending greater than what would have been possible in the absence of government support. And this assistance will come with terms that should encourage the institutions to replace public assistance with private capital as soon as that is possible.

"The Treasury's investments in these institutions will be placed in a new Financial Stability Trust.

• "Second, alongside this new Financial Stability Trust, together with the Fed, the FDIC, and the private sector, we will establish a Public-Private Investment Fund. This program will provide government capital and government financing to help leverage private capital to help get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions....

"We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it. We believe this program should ultimately provide up to one trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works.

• "Third, working jointly with the Federal Reserve, we are prepared to commit up to a trillion dollars to support a Consumer and Business Lending Initiative. This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again.

"In our financial system, 40% of consumer lending has historically been available because people buy loans, put them together and sell them. Because this vital source of lending has frozen up, no financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses – large and small.

"This lending program will be built on the Federal Reserve's Term Asset Backed Securities Loan Facility, announced last November, with capital from the Treasury and financing from the Federal Reserve.

'"We have agreed to expand this program to target the markets for small business lending, student loans, consumer and auto finance, and commercial mortgages.

"And because small businesses are so important to our economy, we're going to take additional steps to make it easier for them to get credit from community banks and large banks. By increasing the federally guaranteed portion of SBA loans, and giving more power to the SBA to expedite loan approvals, we believe we can turn around the dramatic decline in SBA lending we have seen in recent months."

• "Finally, we will launch a comprehensive housing program. Millions of Americans have lost their homes, and millions more live with the risk that they will be unable to meet their payments or refinance their mortgages ... We will announce the details of this plan in the next few weeks."