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Sources: US toxic asset plan near completion

(Agencies)
Updated: 2009-03-21 10:42

The initial proposal was widely panned by investors, who were disappointed in a lack of specifics. The Dow Jones industrial average tumbled 380 points on the day the original program was announced.

Geithner's new plan would tap the resources of the Fed and the FDIC to attack what many analysts see as the major failing of the bank rescue effort so far, the failure to rid banks' of more than $1 trillion in bad loans and other toxic assets weighing down their books. As a result, banks have been unable to shake off the effects of the worst financial crisis to hit the country in seven decades.

Related readings:  Source: US 2009 budget deficit revised to $1.8 trillion  Fix US banks first to end global recession  US lawmakers probe AIG bonuses  China hopes US will ensure security of Chinese assets

While the administration included a placeholder in its budget request last month for as much as an additional $750 billion in rescue funds, more than doubling the current commitment, the uproar over the AIG bonuses has underscored the dim prospects that Congress would vote to bolster the size of the current fund.

The effort to deal with toxic assets is the latest in a string of initiatives the administration has put forward to deal with the financial crisis that had made it hard for consumers and businesses to get loans and has deepened the current recession, already the longest in a quarter-century.

The administration has put forward new programs to deal with mortgage foreclosures, expanded efforts to bolster lending to small businesses, launched with the Fed the TALF to unfreeze markets that support credit card, auto and student loans and also begun a so-called stress test of the country's 19 largest banks to make sure they have sufficient resources to withstand an even more severe recession.

A key unknown is whether the new plan to deal with toxic assets will succeed in attracting private investors to start buying the bad assets. Investors have fled these markets, scared off by the billions of dollars of losses that have already incurred on everything from mortgage-backed securities to consumer and business loans.

Hedge funds and other big investors may be even more leery of accepting the government's enticements to purchase these assets for fear of the imposition of tighter government restraints in such areas as executive compensation in the wake of the uproar over AIG.

In addition to unveiling his plan for toxic assets, Geithner is also expected to put forward next week the administration's proposals to overhaul the government's current financial regulatory structure.

President Barack Obama said this week that this plan will include a proposal to give the administration expanded authority to take control of major troubled institutions that are deemed too big to fail because their collapse would pose a risk to the entire financial system.

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