Administration Unveiling Bailout Overhaul

WASHINGTON (AP) -- The Obama administration is promising an aggressive effort to combat the worst financial crisis in seven decades, unveiling a program that could mobilize well over $1 trillion in public and private support to get the frozen credit markets functioning again.

Treasury Secretary Timothy Geithner said Tuesday the new plan would bring the full force of the federal government to bear in a partnership with the private sector.

"Right now critical parts of our financial system are damaged," Geithner said. "Instead of catalyzing recovery, the financial system is working against recovery and that's the dangerous dynamic we need to change."

The new plan would greatly expand an effort to unclog credit markets that provide loans to consumers and businesses. Funding for this effort would see a huge increase -- from $20 billion up to $100 billion -- according to administration officials.

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 a Federal Reserve program announced in November but not yet operational.

The administration also announced that the program would be expanded beyond consumer and small business loans to provide aid to the troubled commercial real estate sector.

The administration revealed, in addition, a program to create a partnership between the government and the private sector to get private investors to buy bad assets that are currently weighing down the balance sheets of banks. Congressional aides who were briefed on this plan said Treasury officials described it as involving between $250 billion and $500 billion in government support.

With just those two programs, Geithner outlined efforts that could total $1.5 trillion. However, the public-private partnership to sop up bad assets would depend heavily on how much interest the private sector had in participating in the program. Details of that effort were still being worked out.

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

With the release of the bailout overhaul, Geithner said the administration was launching a two-front war on the economic crisis gripping, the country, pushing Congress to pass a more than $800 billion economic stimulus program to create jobs and improving ways to more fully utilize the full resources of the $700 billion bailout program that Congress passed last October.

The new administration's bailout overhaul sought to address widespread criticism in how the program was run by the Bush administration. 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 will also have to undergo a stress test of their balance sheets to ensure they are in sound enough condition to receive additional government support.

President Barack Obama, speaking at a prime-time news conference Monday night, said his overhaul of the financial rescue program would bring "transparency and oversight" to the heavily criticized program.

He said the overhaul would correct previous mistakes such as a "lack of consistency" and what he said was the failure to require banks to show "some restraint" in terms of executive compensation and spending in such areas as corporate jets.

Congress passed the financial rescue bill on Oct. 3 and the first $350 billion in the 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, Obama said Monday that 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 major elements of the bailout effort include:

--Continued government purchases of stock in banks as a way to bolster banks' balance sheets. The new stock purchases will come with tighter oversight to make sure banks are using the government support to increase lending. The new requirements will not apply to banks that have already received support.

--A government-private sector partnership aimed at encouraging private investors to buy banks' bad assets, although details were yet to be fully worked out. Congressional aides said that the administration was looking at possibly providing guarantees to investors who purchase the assets or using the Fed's resources to lower the borrowing costs of investors buying the toxic assets.

--Provision of at least $50 billion of the remaining $350 billion rescue fund to bolster government efforts to help homeowners deal with rising foreclosures in the current steep housing slump. The actual details on the housing measures were postponed for an announcement expected to occur in the next two weeks.

AP Real Estate Writer Alan Zibel contributed to this report.