The U.S. Treasury Department on Monday rolled out detailed plans for persuading private investors to help rid banks of up to $1 trillion in toxic assets that are seen as a roadblock to economic recovery.
Generous government financing will underpin the so-called Public-Private Investment Program, which Treasury will kick off with $75-$100 billion that comes from its existing $700-billion bailout fund approved by Congress last fall.
The plan is being launched in a volatile environment, with lawmakers angry over big bonus payments made to executives at bailout recipient American International Group.
Public and lawmaker fury over the bonuses, and efforts on Capitol Hill to claw them back, have made many investors skittish about partnering with the government, but Treasury specified that private partners in its latest effort to revive credit markets will not face tough executive pay restrictions.
U.S. stocks opened higher on the plan on Monday, a sharp contrast to the painful disappointment registered after Geithner offered only a scanty outline of the plan on February 10.
While Treasury, in company with private investors, will put up initial financing, the Federal Deposit Insurance Corp and the Federal Reserve will be tapped to offer further financing.
Under one component of the plan, Treasury will provide up to 80 percent of the initial capital, which would go alongside investment by private funds. The FDIC would then offer debt financing for up to six times the pooled amount.
A separate component will have the Federal Reserve widen the financing it now provides under its new Term Asset-Backed Securities Loan Facility, or TALF. That $200 billion program, will be bumped up to $1 trillion and will begin accepting older mortgage-related and other securities as loan collateral.
In addition, Treasury will approve up to five investment managers and match their money one-for-one and offer debt financing for 50 percent of the combined capital pool to buy securities banks want to unload.
Geithner believes the plan will help set prices for poorly performing debt left over from the U.S. housing bust, while involving the market to avoid the risk taxpayers will overpay.
The success of the plan is seen as a key test for Geithner, who already has faced a few calls for his resignation from lawmakers disgruntled over the AIG bonuses.
Two of the largest U.S. money managers, BlackRock and PIMCO, expressed interest in participating.
This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate and do our part to serve clients as well as promote economic recovery, Bill Gross, PIMCO's co-chief investment officer, told Reuters.
The Obama administration has stressed that the banking sector's problems are so serious that the government cannot solve them alone, and Geithner on Monday underlined that market participation is vital.
For these programs to work investors have to be prepared to take some risk, he said.
Geithner said the Treasury has enough capital in the bailout fund approved by Congress next year to get the program started. He told reporters it was too soon to say whether more money would be needed to fix the stressed banking sector.
(Additional reporting by Jennifer Ablan)