Plan to impose new rules, aims to unclog credit

Geithner to announce administration’s overhaul of financial rescue plan
msnbc.com staff and news service reports

WASHINGTON - The Obama administration, seeking to deal with the political outrage over the handling of the government’s $700 billion financial rescue program, plans to impose tough new standards on future payments to banks. It is also greatly expanding an effort to unclog credit markets to provide loans to consumers and businesses.

Funding to unfreeze borrowing in such areas as credit card debt, auto loans and student loans, will see a huge increase — from $20 billion to $100 billion, according to administration officials who spoke on condition of anonymity because the program had not yet been publicly announced.

The officials said the increase, combined with a program operated by the Federal Reserve, would be enough to support an additional $1 trillion of lending in this area. Officials said the program would also be expanded beyond consumer and small business loans to cover loans for commercial real estate projects.

Treasury Secretary Timothy Geithner, who is scheduled to unveil the new plan Tuesday morning, said that the new plan was intended to change the “dangerous dynamic” of a financial system that was impeding economic recovery rather than supporting it.

“It is essential for every American to understand that the battle for economic recovery must be fought on two fronts,” Geithner said in excerpts of remarks obtained by The Associated Press. “We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families.”

Appearing on television Tuesday morning, White House press secretary Robert Gibbs said the overhaul of the financial system rescue plan due to be unveiled by Geithner will provide much greater spending accountability to the American people.

The previous administration’s disbursement of money under the first installment of TARP — the Troubled Asset Relief Program — has been widely criticized in both public and private circles as a process too secretive and unworkable.

“It’ll be more transparent,” he said flatly.

Gibbs said that changes in the bailout system that Geithner is scheduled to announce will be aimed at making certain that banks getting taxpayer assistance will be “lending that money ... to people who need it.”

He appeared Tuesday morning on ABC’s “Good Morning America,” NBC’s “Today” show and CBS’s “The Early Show.”

The major overhaul of the program begun by the Bush administration seeks to address widespread criticism that banks were getting billions of dollars in taxpayer support with few strings attached and that all the government aid was failing to deal with the worst financial crisis to hit the country in seven decades.

The New York Times reported Tuesday that the new plan evolved out of a “spirited” debate between Geithner and President Barack Obama's top political aides.

The Times, citing administration and Congressional officials, reported that the Treasury secretary largely prevailed in his opposition to more stringent restrictions on financial institutions sought by Obama aides, including David Axelrod, the senior advisor to the president.

Under the overhaul, the administration will seek 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.

The administration’s new plan, officials said, will include a government-private sector partnership aimed at removing toxic assets from banks’ balance sheets, although the details on how this program would operate were still being worked out.

Treasury officials suggested two approaches that the administration is considering, according to congressional staffers who were briefed on the plan Monday night and also spoke on condition of anonymity before the program was unveiled.

These aides said the government might provide guarantees for the bad assets to establish a floor on possible losses, or perhaps provide low-cost financing through the Federal Reserve for investors willing to purchase the bad assets.

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.

However, that effort generated a huge political backlash with critics charging that the Bush administration failed to impose enough restrictions on banks to make sure they used the billions of dollars they were receiving to boost lending and keep the country from toppling into an even deeper recession.

In part because of the political outrage, 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, pushing the ultimate price tag for the rescue to $1 trillion or more.

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.

Officials, speaking on condition of anonymity before the plan’s release, said it would include the following major elements:

* 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.
* 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 being delayed for an announcement in the coming weeks.

The mortgage support would be a major policy shift from the Bush administration, which relied on voluntary, industry-led measures and did not want to commit taxpayer dollars to foreclosure prevention. The administration was still reviewing various proposals on exactly how the new anti-foreclosure efforts would be implemented.