Feds aim to get toxic assets off bank books

WASHINGTON — After an unsuccessful first attempt, the Treasury Department is poised to announce today details of its plan to help get so-called toxic assets off the balance sheets of the nation's largest and often most troubled financial institutions.

Treasury Secretary Timothy Geithner was to meet with reporters shortly before the opening bell for trading on the New York Stock Exchange. He'll outline the public-private partnership he only discussed in broad strokes Feb. 10, which caused financial markets to dive worldwide because of a lack of long-awaited detail.

Geithner was expected to announce a plan in which Treasury will use $75 billion to $100 billion from last year's $700 billion Wall Street bailout. This money, from the Troubled Asset Relief Program, or TARP, will be used as seed money to partner with the private sector.

Together, the government and private sector will team up to purchase the pools of mortgages, called mortgage-backed securities, which are the root of the nation's deep economic problems. Banks have been forced to write down the value of these assets quarter after quarter, because there are no buyers.

Without buyers for securities, banks have been unwilling to lend, even though mortgage rates are very low by historical standards.

"This is starting a market for these assets where there is none," said an administration official, speaking on the condition of anonymity in order to speak freely.

Under the public-private partnership, an auction process will be established for the purchase of these assets, with the help of the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC).

The Fed will provide a facility to finance purchases of securities, while the FDIC will help finance the purchase of loans off bank balance sheets.

Banks have been unwilling to sell these distressed assets at fire-sale prices and investors have been unwilling to purchase them unless they are at a discount much steeper than banks have been willing to accept.

"This plan has a good chance of success; certainly much better than the plan Treasury put forward six weeks ago," said Mark Zandi, chief economist at Moody's Economy.com, a forecaster in West Chester, Pa.

"This plan relies much less on private investors and much more on direct government purchases of banks' troubled assets," Zandi said. "Only a handful or so of private investors need to participate in this plan to establish workable auctions for the assets and thus determine a fair price for the assets."

Pricing of these assets remains the stumbling block, and is why former Treasury Secretary Henry Paulson pivoted away from purchasing troubled assets as first envisioned under the Wall Street rescue plan last October.

The idea behind the Geithner plan is to establish some preliminary pricing. If the market begins to revive, the administration is likely to seek more funds to help it grow.

"The government can then come in and buy these assets on a large scale at these prices. (Roughly) $1 trillion is not enough; it probably needs to be twice that," said Zandi.

"But if the plan works well enough, I think Congress will provide more money to solve the problem once and for all," he said. "This plan makes me more optimistic about the financial prospects for the financial system and the economy."

The plan for toxic assets is the last, and most vital link, of the Obama administration's broad financial-rescue program.

Under this broad program, all federal banking regulators have started stress tests on the nation's 19 largest banks to determine if they have sufficient capital to survive an even deeper recession than the one now on pace to be the longest since the Great Depression.

By the end of April, these banks, if deemed insufficiently capitalized, will have to raise capital in the private sector within six months or get cash from the government. In that case, taxpayers would get a stake.

Since Feb. 10, the Treasury Department has rolled out incentives to help refinance or modify distressed mortgages.

The department and the Federal Reserve have jointly put into place a program to have the Fed buy bundles of credit-card debt, student loans, car loans and small-business loans in hopes of sparking lending.