The U.S. government will roll out next week a three-pronged bid to cleanse the U.S. financial system of toxic assets clogging banks' balance sheets, a source familiar with the plan said on Saturday.

The plan, a cornerstone of the Obama administration's costly attack on the credit crisis, will aim to attract private investors by offering abundant loans and generous terms.

Its architect, Treasury Secretary Timothy Geithner, is under huge pressure after providing such a scanty outline of the plan last month that bank stocks slumped and triggered fears that some U.S. lenders might be nationalized.

But with fury still raging among U.S. lawmakers over bonuses to some employees of American International Group (AIG) when it is receiving huge dollops of bailout money, it is unclear how willing private investors will be to work with the government.

Federal Reserve Chairman Ben Bernanke underlined the critical need to restore stability to the banking system last Sunday, warning in a television interview that he feared political and public will to do so was flagging.

In which case, we can't count on recovery, he said.

The new plan for cleaning up bank balance sheets is set to come shortly after another big move by the Fed last week to fight the economic crisis head on.

The central bank said it would pump more than $1 trillion into the U.S. economy by buying debt, on top of a nearly $800 billion stimulus plan by the Obama administration.


The new plan will include setting up an entity to be used by the Federal Deposit Insurance Corp -- the main U.S. banking regulator -- to offer low-interest loans to private interests for buying up banks' soured assets, many of which are tied to mortgages and have tumbled in value, the source said.

Secondly, the Treasury Department will hire investment managers to run public-private funds to invest for potential profit in troubled mortgages, with government capital matching private capital contributions, according to the source.

Finally, the Federal Reserve will expand its new consumer loan-focused $1 trillion Term Asset-Backed Securities Loan Facility to buy so-called legacy assets, the source said.

Legacy assets are older securities, many of them tied to mortgage assets that have plunged in value after housing prices fell and have racked up massive losses for the banking system.

With credit now so tight, the U.S. economy has plunged into a deep and potentially long recession.

The Obama administration plans to contribute between $75 billion and $100 billion in new capital to the effort although that amount could be expanded, the Wall Street Journal said.

The toxic asset plan -- seen as vital to clear the way for the resumption of normal lending -- will seek to enlist private-sector support at an especially tough time.

The past week has seen uproar in Congress and the media over bonuses paid by publicly rescued AIG. Analysts warn that may make hedge fund managers and other managers of private wealth skittish about getting involved with the government.


Congress is a rat's nest of grandstanding right now, said Jack Ablin, chief investment officer with Harris Private Bank in Chicago. If Congress continues to dig its heels in, it will contribute to the destabilization of the financial system.

It remained unclear exactly when Geithner, under fire himself for his role in failing to block AIG bonuses, will roll out his toxic asset plan.

The Wall Street Journal said it could come as soon as Monday but Treasury officials would not confirm that.

Indications were that Treasury would like to see the furor over AIG bonuses die down first as lawmakers angry over that might turn their wrath on the new proposals.

California Democratic Representative Bad Sherman, who sits on the House Financial Services Committee, was skeptical of the latest effort.

It looks like a scheme in which the taxpayer takes all the risk and the hedge funds get almost all the profits, Sherman told Reuters, adding it was not surprising the proposals were framed in such a way that they need not be put to a vote.

I don't think Congress would vote for that, Sherman said. I think Wall Street would vote for that.

Geithner came under personal fire for not doing more to stop the bonus payments, obliging President Barack Obama to come to his defense twice in the past week -- and he does so again in an interview to be shown on 60 Minutes on Sunday.

In it, Obama says that if Geithner tried to offer his resignation, he would tell him: Sorry buddy, you've still got the job, according to transcripts of the interview.

(Reporting by Karey Wutkowski, with additional reporting by Rachelle Younglai, Kevin Drawbaugh and Richard Leong in New York, writing by Glenn Somerville; Editing by Vicki Allen)