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Treasury's Geithner To Unveil Financial Plan Monday

Treasury Secretary Timothy Geithner, as expected, will announce on Monday a "comprehensive plan" to stabilize the financial system.

In a noon news conference, Geithner will lay out a "strategy to strengthen our economy by getting credit flowing again to families and businesses," the Treasury said. The plan will include an aid package for the banking industry, according to a well-informed source.

Treasury Secretary Timothy Geithner
cnbc.com
Treasury Secretary Timothy Geithner

CNBC.com first reported Thursday that the plan was essentially complete and would be announced Monday.

According to the source, the banking component will be "smaller" than originally expected, include some "bad bank" component but be centered around government guarantees and insurance of troubled assets—what's called a "ring fence" concept.

"Everybody seems to like that," said the source. "There's a lot of internal conflict about whether this [the bad bank] makes sense ... they realize they have to do something with the bad bank."

Other sources told CNBC that the "bad bank" would be able to buy up to $500 billion in troubled assets from financial institutions. Every bank would be subject to a uniform "stress test" to see if the bank needs additional capital, these sources said.

At this point, the Obama administration appears to have settled on the most controversial aspect of the bad bank: pricing the toxic debt.

For Investors

The government will buy toxic assets below the banks' "carrying value," which is basically market value, but not at fire-sale levels, the source said, representing something of a compromise.

Such a pricing approach will likely placate both taxpayer and Congressional concerns about the government overpaying for the assets. But, the source noted, it could "trigger an accounting problem for the banks," presumably because the institutions will have to report a loss on the transactions.

The Obama administration is now working on ideas to address that, which might entail a temporary suspension of certain accounting rules. It is unclear what that might be, said the source.

In making the announcement Friday, the Treausry also said Geithner would outline "new measures and conditions to strengthen accountability, oversight and transparency in how taxpayer dollars are spent."

The Treasury statement provided no further details.

The government is also known to be working on a group of measures to aid small business and consumers, including programs to support the housing market—from interest-rate subsidies to home foreclosure relief. Those subjects, as well as new rules on transparency for firms receiving government aid, have been discussed in the last week, according to a source.

CNBC reported Friday that sources say a foreclosure component will be included in Monday's announcement.


'Fast Money' on the Bank Bailout:

Other Measures

The current plan is expected to be smaller that previously expected in that it will be paid for out of the remaining money in the original TARP plan, which is about $350 billion. Some of that money, however, will remain earmarked for home foreclosure relief.

The size of the problem is far bigger than that. Experts estimate there are some $1.5-$2 trillion in such bad assets, either of the non-performing or illiquid variety.

The ring fence concept has already been used withCitigroup andBank of America. It involves government guarantees and insurance provisions for groups of bad assets, but they remain on the balance sheet of the institution. The bad bank concept literally removes them. Both approaches are meant to spur new lending by banks.

Thus far, the bulk of the government's aid under the TARP program has been through a capital-for-equity swap. The so-called capital injection method was adopted at the urging of Congress late last September and then wound up replacing Paulson's original, primary tool of a government auction to buy the troubled assets.

The capital injection program, however, is not expected to be a major part of the new aid package, according to the source. It will also be tweaked, apparently, so that the government receives convertible preferred stock, instead of the current preferred stock.

Also on CNBC.com

The former include an option to be converted, usually any time after a predetermined date, into a amount of common stock, which is how some would now like to see the government take its equity stake.

Regardless of the merits of one measure or another, there's growing consensus in both government and banking that a one-size-fits-all approach is inappropriate. JPMorgan Chase CEO Jamie Dimon, for one, has made that point recently.

Rep. Brad Sherman (D.-Calif.), who voted against the original TARP and favors the capital injection model, now expects any forthcoming plan to include such asset purchases, as well as the ring fence concept and the purchase of toxic assets.

"It's consistent with their view of trying new things," says Sherman, a senior member of the House Financial Services Committee.

One of his concerns about the ring fence approach is to what extent the administration might use a multiplier method in backing troubled assets, rather than a virtual dollar-for-dollar approach.

"And the question is will the Fed participate," asks Sherman. If so, he says, it would clearly give the government more money to work with.

Political Factors

The latest developments come as Congressional support for the bad bank concept and additional financial support for the banking sector are fading.

Sen. Charles Schumer (D-NY), asenior member of the Senate Banking Committee, Tuesday joined the bad-bank skeptics, telling CNBC the approach would be "hugely expensive," adding that he prefers government guarantees of such assets.

In a news conference Wednesday afternoon, House Speaker Nancy Pelosi (D.-Calif.) said she was "not so sure" that another bailout request from the Obama administration is inevitable, reversing an a previously-held assumption.

Congressional Democrats, led by House Financial Services Committee Chairman Barney Frank (D.-Mass.) have shared with the new administration their anger and disappointment over former Treasury Secretary Henry Paulson’s administration of the TARP program, which was seen as too generous to and too lenient on Wall Street firms.

They've also made it clear that they want significant government funding to aid consumer borrowers, small business and the housing industry, as well as tighter rules on executive pay for firms participating in the TARP. President Obama unveiled those rules Wednesday.

The source said the Obama administration is keenly aware of the political dynamic and is thus proceeding at a cautious pace. Some in Congress agree.

"I think they've talked to the political leadership," says Rep Sherman. "Everything they're doing with the second $350 billion [of the TARP] is with an eye to asking for a third $350 billion and we'll be lucky if it is only $350 billion."

The timing of the announcement on Monday is significant. Starting Tuesday, Geithner will brief the respective houses of Congress on a variety of new measures meant to ease the credit crunch.

- CNBC Senior Economics Reporter Steve Liesman contributed to this report.

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