U.S. plan to buy toxic assets near
Treasury chief Geithner is poised to announce details of next step in rescuing banks: Public-private partnerships.


NEW YORK (CNNMoney.com) -- The Obama administration will soon unveil a program to help banks clean up their books by purchasing their bad assets, two senior administration officials told CNN.

Treasury Secretary Tim Geithner will announce the plan early next week, the officials said.

The effort represents a big change in Washington's six-month-old bank rescue, which has so far mostly entailed making capital investments in exchange for stock shares and insuring bank obligations.

Investors have been waiting expectantly for details since last month when Geithner announced the framework of a plan to address two of the biggest problems in the banking sector: the toxic assets keeping banks from lending and the shortage of capital at major institutions.

At the time, Geithner pledged to raise as much as $500 billion from public and private sources to relieve banks of toxic assets. But he didn't explain how the program would bring together buyers and sellers who have been locked in a stalemate for 18 months.

Under the plan being considered, government funds will be used to effectively seed partnerships with private firms to buy up assets backed by mortgages and other loans.

A Treasury spokesman declined to comment.

The effort will involve the Federal Deposit Insurance Corp., Treasury Department or Federal Reserve, the administration officials said.

The FDIC will set up investment partnerships and lend those partnerships about 85% of the money needed to buy toxic assets. Treasury will hire several investment firms to raise private funds, and also work with the Federal Reserve to expand lending.

"We do know that banks have these so-called toxic assets on their balance sheets," Christina Romer, a top White House economic adviser, said Sunday on CNN's "State of the Union."

"They are making banks unwilling to lend, they're making private investors unwilling to come into banks," Romer said. "We need to get those off the banks' balance sheets."
Getting private sector involved

So-called public-private partnerships could accomplish two critical goals: to lure private capital into the process of rescuing troubled institutions, and to use market forces to set prices for hard-to-value assets.

In the end, the aim is to unfreeze the credit markets, which have been weighed down by consumer and investor fears about future losses at the nation's banks.

The financial crisis, considered the worst since the Great Depression, was sparked by a rapid decline of housing prices leading to high levels of mortgage defaults. Banks and other institutions that bet on those mortgages, often in the form of complex securities that packaged up slices of loans, have suffered huge losses in recent quarters.

Last fall, Congress and the Bush administration came together to pass an unprecedented $700 billion bailout plan, which has among other things pumped nearly $200 billion into hundreds of banks big and small.

President Obama and Geithner have been working for months, even before Obama took office in January, to fashion a comprehensive strategy for rescuing the banks.
0:00 /24:35Geithner opens up

Geithner's plans have been weighed down in recent days by congressional and public backlash against retention bonuses paid to employees of American International Group, a troubled insurer now majority owned by the government that has become a magnet for criticism.

-CNN senior White House correspondent Ed Henry contributed to this report. To top of page
First Published: March 21, 2009: 12:24 PM ET