Treasury’s Toxic Asset Plan Could Cost $1 Trillion

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WASHINGTON – The Obama administration's latest attempt to tackle the banking crisis and get loans flowing to families and businesses will create a new government entity, the Public-Private Investment Program, to help purchase as much as $1 trillion in toxic assets on banks' books.

The new effort, to be unveiled Monday, will be followed the next day with release of the administration's broad framework for overhauling the financial system to ensure that the current crisis — the worst in seven decades — is not repeated.

A key part of that regulatory framework will give the government new resolution authority to take over troubled institutions that would pose a threat to the entire financial system if they failed.

Administration officials believe this new power will save taxpayers money and avoid the type of controversy that erupted last week when insurance giant American International Group paid employees of its troubled financial products unit $165 million in bonuses even though the company had received more than $170 billion in support from the federal government.

Under the new powers being sought by the administration, the treasury secretary could only seize a firm with the agreement of the president and the Federal Reserve.

Once in the equivalent of a conservatorship, the treasury secretary would have the power to limit payments to creditors and to break contracts governing executive compensation, a power that was lacking in the AIG case.

The plan on toxic assets will use the resources of the $700 billion bank bailout fund, the Federal Reserve and the Federal Deposit Insurance Corp.

The initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price.

When Treasury Secretary Timothy Geithner released the initial outlines of the administration's overhaul of the bank rescue program on Feb. 10, the markets took a nosedive. The Dow Jones industrial average plunged by 380 points as investors expressed disappointment about a lack of details.

Christina Romer, head of the Council of Economic Advisers, said Sunday that it's important for investors to know that the administration is bringing a full array of programs to confront the problem.

"I don't think Wall Street is expecting the silver bullet," she said on CNN's "State of the Union." "This is one more piece. It's a crucial piece to get these toxic assets off, but it is just part of it and there will be more to come."

But private economists said investors may still have doubts about whether the government has adequate resources to properly fund the plan and whether private investors will be attracted to participate, especially after last week's uproar concerning the AIG bonuses, which has added to the anti-Wall Street feelings in the country.

Romer said the new toxic asset program would utilize around $100 billion from the $700 billion bailout fund, leaving the fund close to being tapped out.

Mark Zandi, an economist at Moody's, estimated that the government will need an additional $400 billion to adequately deal with the toxic asset problem, seen by many analysts as key to finally resolving the banking crisis.

Administration officials, who briefed reporters late Sunday night, said no decision had been made on asking Congress for more money at the present time.

These officials, who spoke to reporters on condition of anonymity because the plan had not yet been released, said the goal was to prove that the asset purchase program could achieve success with the resources available to it.

In its budget request to Congress last month, the administration included a placeholder for an additional $750 billion in bailout funds, but many lawmakers said there was little chance more money will be approved, given the current political environment.

Zandi said the administration has no choice but to rely heavily on government resources because of the urgency of getting soured real estate loans and troubled asset-backed securities off the books of banks so that they can resume more normal lending to consumers and businesses.

"This is a start and we will see how far it goes, but I believe they will have to go back to Congress for more money," he said.

The Public-Private Investment Program that will be created was viewed as performing the same functions — selling bonds to finance purchases of bad assets — as a similar organization did for the Resolution Trust Corp., which was created to dispose of bad real estate assets in the savings and loan crisis of the 1980s.

According to administration and industry officials, the toxic asset program will have three major parts:

_A public-private partnership to back private investors' purchases of bad assets, with government support coming from the $700 billion bailout fund. The government would match private investors dollar for dollar and share any profits equally.

_Expansion of a recently launched Fed program that provides loans for investors to buy securities backed by consumer debt as a way to increase the availability of auto loans, student loans and credit card debt. Under Geithner's plan for the toxic assets, that $1 trillion program would be expanded to support purchases of toxic assets.

_Use of the FDIC, which insures bank deposits, to support purchases of toxic assets, tapping into this agency's expertise in closing down failed banks and disposing of bad assets.

Some industry officials said hedge funds and other big investors are likely to be more leery of accepting the government's enticements to purchase these assets, fearing tighter government restraints in such areas as executive compensation.

Administration officials, however, insisted Sunday that a distinction needed to be made between companies getting heavy support from the bailout programs and investors who are being asked to help dispose of troubled assets.

Romer said the partnership with the private sector will help ensure that the government doesn't overpay for the toxic assets that it will be purchasing.

"This isn't just another handout to banks," she said on CNN. "We very much have the taxpayers' interest in mind."

The administration's revamped program for toxic assets is the latest in a string of banking initiatives which have also included efforts to deal with mortgage foreclosures, boost lending to small businesses and unfreeze the market for many types of consumer loans.

In addition, the nation's 19 biggest banks are undergoing intensive examinations by regulators that are due to be completed by the end of April to determine whether they have sufficient capital reserves to withstand an even more severe recession. Those that do not will be able to get more support from the government.

The overhaul of financial regulation will be revealed by Geithner in testimony he is scheduled to give Tuesday and Thursday before the House Financial Services Committee.

In addition to the expanded authority to seize big institutions that pose a risk to the entire system, the administration is also expected to offer more general proposals on limiting excesses seen in executive compensation in recent years, where the rewards prodded extreme risk-taking.

The regulatory plan is also expected to include a major change that gives the Federal Reserve more powers to oversee systemic risks to the entire financial system.

The administration is working to unveil its proposed regulatory changes in advance of a meeting of the Group of 20 economic leaders, which Obama will attend on April 2 in London. European nations have complained that lax financial regulations in the United States set the stage for the current financial crisis.

Copyright AP - Associated Press
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