New Bailout May Tip Scales At $1 Trillion

Treasury Secretary Tim Geithner testifies on Capitol Hill in Washington, Tuesday, Feb. 10,2009, before the Senate Banking Committee.
AP Photo/Susan Walsh
Treasury Secretary Timothy Geithner said Tuesday the new administration will wage an aggressive battle against the worst financial crisis in seven decades through programs designed to increase consumer lending and remove toxic assets from banks' balance sheets.

The efforts were part of the government's major overhaul of the widely criticized $700 billion financial rescue program.

Former Fed Governor Fred Mishkin says a bank rescue plan is even more important than the stimulus package, reports CBS News correspondent Anthony Mason.

"The stimulus package, although I think it's necessary, will not work and will not get the economy back to health unless the financial system gets working again," Mishkin said.

The Federal Reserve said it would expand the size of a key lending program to as much as $1 trillion from $200 billion. The program, which has yet to begin operations, is designed to boost resources for consumer credit and small business loans.

The Fed said the program would be expanded to cover the troubled commercial real estate market and certain residential mortgages.

"Instead of catalyzing recovery, the financial system is working against recovery," Geithner said. "At the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it." (Click here to read Geithner's full remarks.)

Geithner said the loss of 3 million jobs last year, and another 600,000 just last month underscored the urgency for government action.

"It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," Geithner said in a speech in Treasury's ornate Cash Room where he unveiled the administration's new plan.

"We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families," he said.

But senators pressed Geithner to provide more details for his overhauled program. Sen. Richard Shelby of Alabama, who is the top Republican on the Senate Banking Committee, said it's hard to test the merits of a plan that is not fully spelled out.

Banking Committee Chairman Christopher Dodd of Connecticut said he would like more specificity on the Obama administration's plan to mitigate mortgage foreclosures.

The Dow tumbled nearly 400 points, as Wall Street critics saw more of a concept than a plan, Mason reports

"A concept is 'let's be in Chicago tomorrow.' A plan is 'how do you get there and what time do you leave'," said Art Cashin of UBS Financial Services.

Geithner conceded that the plan he outlined is only the "broad architecture" of the program.

He pledged to "fundamentally reshape" the bailout program with the effort guided by the lessons of financial crises throughout history, but said details of the plan are yet to come.

Following his address, Geithner told CNBC that the Obama administration wants "to be careful to get this right."

The administration's new plan will greatly expand an effort to unclog credit markets that provide loans to consumers and businesses. This effort will see a fivefold increase in bailout funding to $100 billion.

If a total of $100 billion from the bailout fund were used, it would be enough to support an additional $1 trillion in lending support through the Fed's program, known as the Term Asset-Backed Securities Loan Facility, the administration said.

Treasury will also launch a new Web site,, which will detail where these federal funds are going and whether they are succeeding in stabilizing the financial system and promoting new lending, including posting all contracts on the Internet, an administration official told CBS News.

With the admonition that "access to government resources is a privilege, not a right, and comes with tough new conditions and responsibilities," Geithner introduced the four key elements of the plan:

  • Federal bank regulators for the first time will institute uniform standards to help clean up and strengthen banks, conduct "stress tests" to ensure the nation's largest banks can withstand a worsening economy, and provide a capital "buffer" to ensure lending is maintained.
  • The Treasury Department and the Federal Reserve are creating a new consumer business lending initiative to leverage up to $1 trillion to kick-start secondary lending markets, which will bring down costs for responsible borrowers.
  • The administration will create a new public/private investment fund, providing government capital and financing to leverage private capital so that this investor partnership may purchase "toxic" assets. Private sector buyers will consequently be determining the price for these illiquid assets. (Last week the Congressional Oversight Panel said that Treasury may have overpaid for toxic stocks by as much as $78 billion last fall.)
  • Treasury and the Fed will commit $50 billion to reducing monthly payments and establish loan modification guidelines for government and private programs to help keep homeowners in their houses, and require any firm receiving federal funds to participate in foreclosure mitigation plans.

    The focus on aiding borrowers was seen as a welcome change by consumer advocates, who unsuccessfully pressed the Bush administration to take similar steps. But details of the foreclosure prevention efforts were not expected to be released until later this month.

    "Certainly the flavor has changed and that's encouraging, but we need the meat on the bone here," said John Taylor, chief executive of the National Community Reinvestment Coalition, a consumer group in Washington that's pressing the administration to buy up distressed loans in bulk and modify them so borrowers stay in their homes.

    Geithner said he realized the financial rescue represented a sizable commitment, but noted that many of the amounts were loans and loan guarantees, which means the government eventually will be repaid.

    Still, the country should know that the program will involve costs to the government and risks, but he said the alternative of doing nothing would be far riskier.

    "As costly as this effort may be, we know that the complete collapse of our financial system would be incalculable for families, for businesses, and for our nation," Geithner said.

    Congressional aides said the administration was looking at possibly providing guarantees to investors who purchase the toxic assets or using the Fed's resources to lower their borrowing costs.

    But Christopher Whalen, managing director of Institutional Risk Analytics, said the new plan doesn't aggressively tackle the issue of how to get the toxic assets off banks' books so they'll start lending again.

    "We're still not dealing with the core issue," he said. "It's more incremental thinking."

    The government is betting that access to Fed loans will entice private investors to buy toxic assets, but Whalen said many hedge funds, private equity firms and other investors are still wary of trading them.

    "Most fund managers see these assets and don't want to touch them," he said. "They can't sell them."

    With just the consumer lending and bank asset programs, Geithner outlined efforts that could total $2 trillion. However, the public-private partnership to sop up bad assets will depend heavily on how much interest the private sector has in participating in the program. Details of that effort were still being worked out.

    And the projected $1 trillion partnership with the Fed to unclog the markets supporting credit card debt, as well as auto, student and small business loans also will depend on the interest that private investors show in participating in a program the Fed has been working since November to launch.

    Geithner said the administration's efforts to deal with the financial crisis would supplement the $800 billion-plus economic stimulus program the administration is pushing Congress to pass. The Senate approved $838 billion in stimulus spending Tuesday, sending the package into a conference for House and Senate lawmakers to work out a final version.

    The new administration's bailout overhaul sought to address widespread criticism in how the Bush administration ran the $700 billion program Congress passed in October. Lawmakers in both parties charged that banks were getting billions of dollars in taxpayer support with few strings attached, and that all the government aid was failing to accomplish its primary objective of getting banks to resume more normal lending.

    Under the overhaul, the Obama administration seeks to deal with those issues by more closely monitoring banks to make sure the money they receive is being used to increase lending.

    The biggest banks participating in the program also will have to undergo a "stress test" of their balance sheets to ensure they are in sound enough condition to receive additional government support, Geithner said.

    The first $350 billion in the bailout program was committed by the Bush administration under the direction of former Treasury Secretary Henry Paulson. In part because of the political outrage over how the program has been run, the Obama administration decided against seeking any additional money beyond the $350 billion left to be spent as part of its initial overhaul.

    Many economists believe that $700 billion will not be enough to get the financial system operating normally and that the administration will eventually have to ask for billions more. The administration, however, decided to try to increase the power of the program by using smaller amounts of bailout money to harness bigger resources available at the Fed and in the private sector.

    Asked about the possibility that his administration will ultimately need more money, Mr. Obama said Monday the goal now is to "get this right" because it was important to restore financial market confidence so banks will resume more normal lending.

    The Dow Jones industrial average gave the Treasury secretary a cold greeting. The average plunged about 275 points in early afternoon trading as financial stocks led the market lower.