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White House moves to unclog credit markets

March 23, 2009

WASHINGTON (AP) -- The Obama administration launched a new effort Monday to end a paralysis in lending, saying it will team with investors to initially buy up to a trillion dollars of bad assets from banks that have been reluctant to make loans to consumers and companies.

In announcing the program, Treasury Secretary Timothy Geithner pleaded for patience, saying that work to rehabilitate an industry with such systemic problems must go forward despite "deep anger and outrage" over executive bonus payments.

Geithner's performance in President Barack Obama's Cabinet has come under heavy criticism from some in Congress. The secretary announced the initiative in a Treasury Department room with no cameras allowed. He was with Obama later in the morning, however, when the president spoke briefly, saying he was "very confident" the latest plan will succeed.

Obama called it "one more critical element" in a multi-pronged effort to revive the economy and said the depressed housing market is beginning to show glimmers of hope.

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Geithner said the new program will initially seek to harness government and private resources to purchase a half-trillion dollars of bad assets off the balance sheets of banks and said he expects that purchases eventually could grow to $1 trillion.

Wall Street seemed to feel rejuvenated, at least at the opening. In late morning, the Dow Jones industrial average was up 221 at 7,500. Reaction to an earlier administration bank rescue program on Feb. 10 was anything but enthusiastic, with dispirited investors sending the Dow Jones plummeting by 380 points.

The administration's newest toxic-asset repellant was another in a string of banking initiatives that have included efforts to deal directly with mortgage foreclosures, boost lending to small businesses and thaw out the credit markets for many types of consumer loans.

Administration officials said the plan put forth Monday will deploy $75 billion to $100 billion from the government's existing $700 billion bailout program for the purchase of bad assets -- resources that will be supported by loans from the Federal Deposit Insurance Corp. and a loan facility being operated by the Federal Reserve.

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.

Whereas Geithner suggested there was no alternative to the plan, Republicans said otherwise. House GOP Whip Eric Cantor said he hoped the administration would consider instead an earlier GOP proposal to set up a government-sponsored insurance program for mortgage-related securities.

Cantor, R-Va., called Obama's plan a "shell game" that hid the true cost.

"As described, the plan seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer," Cantor said in a statement.

Geithner was scheduled to testify on Tuesday before the House Financial Services Committee.

The secretary 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."

Devising bailout plans has never been easy work, and the brouhaha surrounding millions in executive retention bonuses paid out by financially strapped American Insurance Group, Inc., hasn't improved the political atmosphere.

Officials said they expect participation by a broad array of investors ranging from pension funds and insurance companies to hedge funds. To achieve that goal, the program would be set up to entice private investors with low-cost loans provided by the Federal Deposit Insurance Corporation and the Federal Reserve. The government itself would shoulder the bulk of the risk.

Geithner has said that the country cannot afford to simply wait for banks to work off these bad assets over time.

Christina Romer, who heads the White House Council of Economic Advisers, said: "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."

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