US offers $2 trillion bank plan

US Treasury chief Timothy Geithner on Tuesday unveiled a new bank rescue plan that would put $2 trillion to work mopping up bad assets and restoring credit, but stock markets plunged on fears it would not work.

Global markets had intensely awaited Geithner's ideas for a plan mixing private and public funding to stabilize a financial system tottering under the weight of bad mortgages, but were disappointed over the scant details provided.

The Dow Jones industrial average ended down 4.6 per cent -- its biggest one-day percentage drop since December 1 -- with bank stocks hit particularly hard. US government bonds rose as investors scrambled for safe-haven debt.

In a speech on television and in Capitol Hill testimony, Geithner made his case for how the Obama administration plans to handle the roughly $350 billion left in a $700 billion financial bailout fund approved by Congress in October.

Geithner said the lack of public confidence in prior rescue efforts had made it all the more difficult to stop "a dangerous dynamic" in which a lack of credit undercuts the economy and leads to more weakness among banks, worsening the recession.

"This is very complicated to get it right," he said in an interview on Bloomberg Television. "We are going to try to get it right before we give the details so that we don't add further to uncertainty in these markets."

He steered clear of saying whether the administration might have to ask Congress for more money to fix the banks, restore credit and counter recession, but did not rule it out.

"We're going to consult with the Congress carefully to try to make sure the world understands that the resources necessary to solve this will be available over time," Geithner told CNBC, adding: "The important thing is that ... we send a basic signal, working with the Congress, that we will do what's necessary to fix this."

The lack of details frustrated many market participants.

"Investors want clarity, simplicity and resolution. This plan is seen as convoluted, obfuscating and clouded," said James Ellman, president of Seacliff Capital in San Francisco.

But Thomas Priore, president of ICP Capital in New York, gave Geithner credit for candidly laying out the depth and difficulty presented by the problem of how to restart credit flows when banks are burdened by hard-to-value, weak assets.

"He told it like it is. That's a start," Priore said.

LEVERAGING PRIVATE MONEY

Geithner defended his decision to put forward what he called a framework instead of waiting until a detailed proposal was ready.

"If we wait and we take the approach that we don't lay that out, ever, until we've solved every problem and every detail, then I think that itself will create greater uncertainty," he said, acknowledging he was "very sensitive" to criticism about the approach.

A centerpiece of the renamed "Financial Stability Plan" is a proposal to set up a public-private investment fund, in partnership with the Federal Deposit Insurance Corp, a bank watchdog, and the Federal Reserve.

Seeded with public money, it would leverage up to $500 billion -- and possibly as much as $1 trillion -- so that toxic assets can be purged from a weakened banking system.

Geithner told an invited audience at the US Treasury that $50 billion in federal rescue funds will be used to try to stem home foreclosures and soften the crushing impact of the deep housing crisis now afflicting the entire economy.

The plan would also expand a Fed program aimed at expanding credit card, student, auto and small business lending.

The facility will grow from its current $200 billion limit to up to $1 trillion, thanks to a jump in Treasury funding to $100 billion from $20 billion.

The lending program would be extended to cover some mortgage-related assets.

The Treasury also said it would continue to pump capital into banks, as the former Bush administration did, but Geithner said there will be conditions attached to ensure the money is lent and that top executives heed restraints on their pay.

In return for the capital, the government would receive preferred shares in the banks that could convert to common stock.

BANK FIX PART OF LARGER PLAN

Geithner said it was critically important to restore credit flows in order for a separate $800-billion-plus package of tax cuts and government spending measures to lift the economy.

Shortly after Geithner announced the plan, the US Senate cleared an $838 billion stimulus package, which needs to be reconciled with a separate bill approved by the US House of Representatives.

The Treasury is tussling with the worst financial crisis since the Great Depression as careless lending fueled a housing boom gone bust, dragging the US economy -- and much of the rest of the world -- into a deep recession.

President Barack Obama said on Monday that cleaning up banks' balance sheets was a priority and did not rule out the possibility that it will take more money than the $700 billion Congress already has approved to complete the job.

"We don't know yet whether we're going to need additional money or how much additional money we'll need until we see how successful we are at restoring a level of confidence in the marketplace," Obama told a news conference.

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$2 trillion bank plan broad in scope,

short on specifics

Acknowledging that Americans have “lost faith” in the government’s effort to rescue the banking system, Treasury Secretary Timothy Geithner outlined a sweeping overhaul and expansion of the program Tuesday.

The new program will seek to marshal as much as $2 trillion from the Treasury, private investors and the Federal Reserve.

But Geithner left major questions unanswered about the workings of many components of the new plan, and officials acknowledged that they had yet to decide many of the thorniest issues.

As a result, it remained unclear whether the Obama administration would be able to attract the large volume of private investment that Geithner sketched out in his speech.

With banks and Wall Street firms buckling under the potentially trillions of dollars in unsellable assets, many of them tied to the collapse of the mortgage market, lobbying associations for the banking and financial service companies praised Geithner’s plan as bold and far-sighted.

But investors were far more restrained. The stock market dipped almost as soon as Geithner began speaking, with the Dow Jones industrial average closing down 381.99 points, or 4.6 percent. And analysts and private investors said they simply did not know enough yet to make a judgment on the plan’s prospects.

Geithner’s primary goal seemed to be to instill confidence that the Obama administration has a coherent and comprehensive approach to the banking crisis, and to distance the new program from the Bush administration’s management of the first $350 billion that Congress authorized last year for the Troubled Asset Relief Program.

“The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to the public distrust,” the Treasury secretary said in a swipe at the Bush administration.

Geithner laid out a multi-pronged program that will include several major components:

A public-private investment fund, run by the Treasury and the Federal Reserve, with financing from private investors, to buy up hard-to-sell assets that have bogged down banks and financial institutions for the past year. Geithner said the new fund, often described as a “bad bank” for holding toxic assets, would start with $500 billion and have a goal of eventually buying up to $1 trillion in assets.

Direct capital injections into banks, which would come out of the remaining $350 billion in the Treasury’s rescue program.

A vast expansion of a lending program that the Treasury and Federal Reserve had already announced, which is aimed at financing consumer loans. The two agencies had originally announced their intention to finance as much as $200 billion in loans for student loans, car loans and credit card debt. The program will be expanded to as much as $1 trillion.

In a separate announcement elaborating on the lending program, the Federal Reserve said it “could broaden” the plan to include both commercial and residential mortgage-backed securities. But the Fed made it clear that no decisions had been made and said any subsequent expansion would “draw on initial experience in administering the program.”

A $50 billion initiative to enable millions of homeowners facing imminent foreclosure to renegotiate the terms of their mortgages is to be announced next week.

The White House is hoping that its rescue plan will be perceived as a more coherent rescue effort than the Bush administration’s and one whose breadth and scope are so vast that it begins to restore financial confidence in the battered markets and entices private investors to come off the sidelines.

The plan is calibrated to work on multiple fronts, with promises to invest billions of dollars in scores of ailing banks and creation of a new institution to relieve bank balance sheets of their most troubled assets.

It will also renew a legislative proposal giving bankruptcy judges greater authority to modify mortgages on more favorable terms to borrowers and over the objections of banks.

Officials say that new rules encouraging transparency and limiting lobbying are intended to begin to restore political confidence in a program that has faced withering criticism in Congress, an effort that they view as essential because they expect to return to Congress for more money later this year.

But as intended largely by Geithner, the plan stops short of intruding too significantly into bankers’ affairs even as they come onto the public dole.

The $500,000 pay cap for executives at companies receiving assistance, for instance, applies only to very senior executives. Some officials argued for caps that applied to every employee at institutions that receive taxpayer money.

Abandoning any pretense about limiting the moral hazards at companies that made foolhardy investments, the plan also will not require shareholders of companies receiving significant assistance to lose most or all of their investment. Some officials had suggested that the next bailout phase not protect existing shareholders.

The New York Times