WASHINGTON: The Obama administration yesterday launched its much-awaited assault on the worst US banking crisis in 70 years, billions of federal dollars to thaw the nation’s frozen credit markets and ease the economy out of recession.
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 $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 worsening global downturn.
President Barack Obama told reporters yesterday his economic team was “very confident” the rescue plan would work and that taxpayers would share both in the upside of the plan as well as the burden of any losses.
Obama further said the economy was beginning to show “glimmers of hope” in the housing market, where the bursting real estate price bubble last year set in motion the financial crisis that nearly brought the system to collapse.
The program may face stiff resistance as it debuts after a week of Wall Street-bashing in Congress, where lawmakers were outraged over troubled insurance company American International Group Inc. paying $165 million in bonuses after taking more than $170 billion in government bailouts to stay afloat.
Obama, who expressed outrage over the payouts, has, nevertheless signaled, opposition to a quickly passed House of Representatives measure to tax such bonuses at 90 percent. In a CBS television interview broadcast Sunday he questioned the bill on constitutional grounds. The program was not the first such attempt by the new administration to revitalize an economy mired in recession.
Geithner counseled patience, saying work to rehabilitate the banking and financial industry has to go forward despite “deep anger and outrage” over bad lending and investment practices.
In a lengthy fact sheet on the bank rescue plan released yesterday, the administration said it expects participation from a broad array of private sources, ranging from pension funds to insurance companies and other long-term investors. The Federal Reserve, which is the US central bank, and the Federal Deposit Insurance Corp., an independent agency of the government that backs bank deposits, will have large roles in putting up the needed cash.
Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan provided in many cases by the Federal Deposit Insurance Corp.
Geithner defended the decision to have the government carry so much of the risk. He said the alternative would have been to do nothing and risk a more prolonged recession or have the government carry all of the risk.
Geithner also said there would be significant advantages from having private market participants bidding against each other to set prices for which the bad assets will be purchased. “There is no doubt the government is taking risks,” he told reporters. “You can’t solve a financial crisis without the government taking risks.”
Geithner, meanwhile, wrote in yesterday’s Wall Street Journal that the new bank program aimed 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 was 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.
The administration hopes the market reaction to this proposal proves 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 that day.
