Financial Rescue to Focus On Shedding Bad Assets

The Treasury's latest financial-rescue plan is expected to use a variety of methods to take bad assets off of banks' books, including encouraging private firms to buy up the toxic debt, sources told CNBC.

Although the concept of creating a "bad bank" to house these assets was considered earlier, the new plan envisions creating a similar type of entity or entities to facilitate the asset sales, sources said.

Uncle Sam taking money out of your wallet
Uncle Sam taking money out of your wallet

In addition, funding for the bank-rescue plan is unlikely to exceed the $350 billion currently available under the TARP, another source said.

"We are going to have to work with the banks in an effective way to clean up their balance sheets so some trust is restored in the marketplace," President Obama said in a press conference Monday night.

A Treasury Department source said the plan was essentially complete with only minor “tweaks” being applied. The plan was presented to members of Congress this evening, according to sources.

The package will be unveiled Tuesday by Treasury Secretary Timothy Geithner at 11 am EST. will carry the speech live.

CNBC will also interview Geithner after the speech at 12 Noon EST. It will be his first television interview since becoming Treasury Secretary.

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Before taking over Treasury, Geithner was president of the New York Federal Reserve Bank and worked on the prior administration's rescue effort but acknowledged it was inadequate and unpopular.

"The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust," Geithner said in remarks prepared for delivery when the new measures are released.

He pledged banks will go through "a carefully designed comprehensive stress test" in future to make sure their balance sheets are clean and they meet requirements for capital.

Congressional sources briefed on the Treasury's plan say it will have four elements.

—Among them will be a plan to use existing funds from the Troubled Asset Relief Program and financing from the Federal Reserve to encourage private investors to purchase assets off the books of the banks.

This plan could come in one of two ways: either the investor could be insured against further losses below a certain level after purchasing assets, or the government could finance the purchase of those assets.

The Treasury says from $250 billion to $500 billion of assets could be purchased this way, with the program eventually expanded up to $1 trillion. A special entity or series of special entities will likely be set up to facilitate the purchases.

—Second, the Federal Reserve will increase the size of the TALF to $500 billion to $1 trillion. It could not be determined if that figure included the existing $200 billion already committed.

As CNBC has already reported, the program will be expanded to include newly issued commercial and private-label mortgage-backed securities. It currently is geared up to finance only consumer student, auto and credit card loans.

—Third, the Treasury will propose using $50 billion for foreclosure mitigation. A more detailed speech on the foreclosure plan is expected next week.

—Fourth, additional captial injections will be made into banks after a systemic review that projects future losses and determine the minimal level of capital based on projected future writedowns.

The idea of involving private capital in the purchase of bad assets has gained speed in recent days. In that way, the government might simply encourage firms to buy the assets or provide some sort government subsidy covering some of the costs.

“You don’t need as many dollars," one source explained, and “the market sets the price.” Such a model would also reduce the likelihood of bank nationalization by demonstrating that the “company is strong enough to attract private capital."

In his presss conference, President Obama said: "We don't know yet whether we're going to need additional money or how much additional money we'll need until we see how successful we are at restoring a level of confidence in the marketplace."

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-- Reuters contributed to this story