US Treasury chief unveils expanded bank rescue plan
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US Treasury Secretary Timothy Geithner unveiled an expanded bank rescue strategy that includes up to $1 trillion in new lending, $50 billion to prevent home mortgage foreclosures and $500 billion dollars to absorb toxic assets.
AFP - US Treasury Secretary Timothy Geithner unveiled a stepped-up program Tuesday to stabilize the financial system including an initial fund of 500 billion dollars to absorb toxic assets.
The plan includes a public-private partnership aimed at soaking up toxic assets clogging the financial system. It also includes new efforts to boost consumer lending, limit home foreclosures and provide new capital for banks.
Geithner said the plan would "bring the full force of the United States government to bear to strengthen our financial system so that we get the economy back on track."
A key element will be a public-private investment fund started with 500 billion dollars "with the potential to expand up to one trillion dollars," to help cleanse the banking system of toxic real-estate assets.
This will serve the role of an aggregator bank, or "bad bank" to help financial institutions value their mortgage securities and clean up their balance sheets.
A second element will include additional capital injections into banks.
"While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive 'stress test' will have access to a Treasury-provided 'capital buffer' to help absorb losses and serve as a bridge to receiving increased private capital," the Treasury said.
Additionally, the Treasury and Federal Reserve will expand a program to boost lending for mortgages and other consumer and business loans to up to one trillion dollars.
The US central bank, in coordination with a Treasury Department effort to steady the financial system, said it was preparing "a substantial expansion" of a program announced last year to get more credit flowing.
"This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again," Geithner said.
The Fed would pump up the amount to one trillion dollars from the previously announced 800 billion for its Term Asset-Backed Securities Loan Facility, which would accept mortgage-backed securities and securities backed by auto loans, credit card loans, student loans, and some small business loans.
The expansion "would be supported by the provision by the Treasury of additional funds from the Troubled Asset Relief Program," the Fed said.
The new effort also commits 50 billion dollars to prevent "avoidable foreclosures" of owner-occupied homes by helping to reduce monthly payments for middle-class families.
"Many of these families borrowed beyond their means. But many others fell victim to terrible lending practices that left them exposed, overextended, and with no way to refinance," Geithner said.
"On top of that, homeowners around the country are seeing the value of their homes fall because of forces they did not create and cannot control."
Geithner said President Barack Obama had ordered "a comprehensive plan to address the housing crisis" that would be announced "in the next few weeks."