New Treasury plan aims to trigger $2 trillion to markets

WASHINGTON -- Treasury Secretary Timothy Geithner unveiled a sweeping plan Tuesday to shore up the nation's troubled financial system.

It is designed to deliver as much as $2 trillion to troubled financial markets by having the government partner with the private sector to buy troubled assets from lenders, make more bank capital injections and expand a Federal Reserve lending program.

"Right now critical parts of our financial system are damaged," Geithner said at a Treasury Department press conference, warning that the nation faces the most serious economic crisis since the Great Depression. "Instead of catalyzing recovery, the financial system is working against recovery, and that's the dangerous dynamic we need to change."

The plan is just one part of overall efforts by the Obama administration, including a roughly $800 billion financial stimulus bill passed by the Senate Tuesday, to tackle the loss of millions of jobs, falling home and asset prices and a historic contraction in credit markets.

"It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," Geithner said. "We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families."

Markets reacted negatively to the plan, however, with the Dow Jones industrial avereage down nearly 400 points in afternoon trading as investors and market analysts worried about the lack of specifcs in the broad proposal.

"The Financial Stability Plan outlined by Treasury Secretary Geithner this morning ... is obviously a work that is still very much a 'work in progress,'" economic consulting firm Stone and McCarthy said in a note to clients "It is quite possible that it may not be a finished product for an extended period of time."

Geithner's plan attacks the credit crisis on several fronts. First, the Treasury Department would use part of the $350 billion remaining from last year's $700 billion financial rescue fund as seed money, to induce the private sector to buy bad assets from banks. The government will create a public-private entity that could buy $500 billion in toxic assets, and could be expanded to a trillion dollars. Treasury has not yet settled on a final design for the program.

The administration will use another $80 billion in financial rescue funds to expand a recently created $200 billion Federal Reserve program. That program, designed to free up money for student loans, credit cards and auto loans, could also cover bonds backed by commercial real estate and privately issued mortgage-backed securities. The new funding is designed to leverage as much as $1 trillion in overall activity under the Fed program.

Geithner noted that 40% of the money for consumer lending has come through bundling loans into securities and reselling them in financial markets. As those so-called secondary markets have frozen, so has consumer and business lending.

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. Geithner said in order to get aid, banks would be subject to beefed up supervision or stress testing, especially big banks. Institutions that need additional capital will be able to access a new funding mechanism using money from the Treasury "as a bridge to private capital," Geithner said.

The renamed "Financial Stability Plan" rolled out by Geithner will also use at least $50 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 plan relies on the Federal Reserve's willingness to expand current, historic programs to aid financial markets. But Fed Chairman Ben Bernanke faced some skepticism at a Tuesday afternoon hearing on Capitol Hill. Some lawmakers said they were worried that the Fed has already expanded its own balance sheet from about $800 billion to nearly $2 trillion as it created lending programs for stressed financial markets. The lawmakers also said the Fed has not released enough public information about its programs.

Rep. Spencer Bachus, R-Ala., accused the Fed and Treasury of using an "obscure and seldom utilized" provision of law to make unprecedented interventions into the financial markets.

"Not only has there been no disclosure or little oversight or accountability, but there's actually been an active resistance on the part of these agencies to explain their actions or disclose the terms," Bachus said. "We simply know almost nothing about these transactions. We can only guess as to their ultimate success or failure. In future years I'm sure those that write (about) these days will be intrigued and captivated by the question: How could such an unprecedented action have occurred without the consent of the governed?"

Bernanke said the vast bulk of Fed loans are safe and are generating profits. He said the central bank is reviewing its policies to ensure it is providing as much public information as possible. He also said the Fed might have to continue expanding its balance sheet in areas such as student loans, auto loans, and other areas where it could help open up markets.

"With our expansion, we're trying to create and stimulate credit markets where markets have broken down," Bernanke said, adding the Fed wants to "keep looking for opportunity" where it has the tools to get markets working again.

Geithner said he realizes the financial rescue represents a sizable commitment, but noted that many of the amounts were loans and loan guarantees, which means the government eventually will be repaid.

Still, the country should know that the program will involve costs to the government and risks, but he said the alternative of doing nothing would be far riskier.

"As costly as this effort may be, we know that the complete collapse of our financial system would be incalculable for families, for businesses, and for our nation," Geithner said.

The new administration's bailout overhaul seeks to address widespread criticism of how the Bush administration ran the $700 billion program Congress passed in October. Lawmakers in both parties say banks were getting billions of dollars in taxpayer support with few strings attached, and all the government aid was failing to accomplish its primary objective of getting banks to lend more.

Under the overhaul, the Obama administration seeks to deal with those issues by more closely monitoring banks to make sure the money they get is being used to increase lending.

President Obama, speaking at a prime-time news conference Monday night, said his overhaul of the financial rescue program would bring "transparency and oversight" to the heavily criticized program.

He said the overhaul would correct previous mistakes such as a "lack of consistency" and what he said was the failure to require banks to show "some restraint" in terms of executive compensation and spending in such areas as corporate jets.

The first $350 billion in the bailout program was committed by the Bush administration under the direction of former Treasury Secretary Henry Paulson. In part because of the political outrage over how the program has been run, the Obama administration decided for now against seeking any money beyond the $350 billion that is still to be spent.

Many economists believe $700 billion won't be enough to get the financial system operating normally and the administration will eventually have to ask for billions more. The administration, however, decided to try to increase the power of the program by using smaller amounts of money to harness bigger resources available at the Fed and in the private sector.

Asked about the possibility that his administration will ultimately need more money, Obama said Monday the goal now is to "get this right" because it is important to restore financial market confidence so banks will resume more normal lending.