MARTIN CRUTSINGER AP Economics Writer WASHINGTON
Th e Obama administration, striving to ease lending in the struggling economy, moved today with private investors to sop up bad bank assets. The administration said the program could grow to $1 trillion in purchases eventually, if it proves successful in attacking the bad-books problem that has been at the heart of the banking crisis. In a lengthy fact sheet, the administration said it plans to use $75 billion to $100 billion from the government's existing $700 billion bailout program for this purpose, and it predicted participation from a broad array of investors ranging from pension funds and insurance companies to hedge funds. To achieve the goal of freeing up more lending, the program would entice private investors with low-cost loans provided by the Federal Deposit Insurance Corporation and the Federal Reserve. The government would also shoulder the vast bulk of the risk. In one example used in the fact sheet, the purchase of a batch of bad mortgage loans would see the private investor put up 6 percent of the cost with the rest provided by the government, with the FDIC covering 84 percent of the cost with a loan and the remaining 6 percent coming from funds from the $700 billion bailout program. Stocks were pointing to a sharply higher opening today as investors began getting details of the new program. That offered a sharp contrast to the r e a c t i o n t h a t Tr e a s u r y Secretary Timothy Geithner got on Feb. 10 when he unveiled the new administration's first bailout initiative. Investor disappointment sent the Dow Jones industrial average crashing by 380 points that day. Geithner's unveiling of the new program was taking place this morning at the Treasury Department with an off-camera briefing. President Barack Obama was scheduled to discuss the program later in the day. In an opinion piece in today's Wall Street Journal, Geithner said the new program was designed 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." "This has never been about helping Wall Street or helping a firm that made mistakes," Christina Romer, head of the Council of Economic Advisers, said today. "It's absolutely about helping a system so that people can get their student loans, and that families can buy their house and buy their cars, and small businesses can get their loans." To encourage investors to be more supportive, the government is offering sizable financial enticements, from shouldering much of the financial risk to providing low-interest loans to purchase the assets. But the program is coming after a week of Wall Streetbashing in Congress, where lawmakers were outraged with the action by troubled insurance c o m p a n y A m e r i c a n International Group Inc. to distribute $165 million in bonuses after obtaining more than $170 billion in government bailouts to remain in business. Some hedge funds and other investors have expressed reluctance to participate in the new program for fear that Congress will subject them to what they view as onerous restrictions on executive compensation. But administration officials insisted that they believe they have found the right mix to attract private investors and make a dent in what, by some estimates, could be more than $2 trillion in troubled assets on banks' books. They said the program has the capacity to purchase $500 billion and possibly as much as $1 trillion in troubled loans, which go back to the collapse of the housing boom and the subsequent tidal wave of foreclosures. But private analysts believe that with the $700 billion bailout fund nearly tapped out by capital injections to banks and lifelines provided to the auto companies and AIG, there are only enough resources left to get the as s e t purchas e program launched. Mark Zandi, an economist with Moody's Economy.com, estimated the government will need another $400 billion to make a sufficient dent in the bad asset problem. Administration officials said they want to get the new program launched and see how successful it is before deciding whether to ask Congress for more resources. The administration included a placeholder in its budget request to Congress last month for an additional $750 billion, more than doubling the financial rescue effort, but many lawmakers have said the current bailout fatigue among voters dims the prospect of getting further resources. According to administration officials, the toxic asset program will include 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. T h e a dmi n i s t r a t i o n ' 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.