US Treasury to Detail Toxic Assets Plan

U.S. Treasury Secretary Timothy Geithner is set to reveal details on Monday of a plan to set up public-private investment funds that could buy up to $1 trillion in troubled loans and securities at the heart of the financial crisis.

Treasury Secretary Timothy Geithner
Treasury Secretary Timothy Geithner

Global markets nervously awaited details from a briefing that Geithner is to hold at 8:45 a.m. EDT on Monday.

The Treasury’s complex plan to use private funds to purchase toxic assets uses low-cost government financing, government guarantees and government equity as incentives, people familiar with the matter say.

There are two parts to the plan -- one to purchase securities, the other to purchase loans from banks, using a combined $75 to $100 billion of funds from the Troubled Asset Relief Program.

These people say the plan will begin with $500 billion, roughly divided between the two different parts, but officials hope to be flexible and adjust the size as markets develop. Taxpayers are potentially on the hook for hundreds of billions of dollars, but officials stress they have built in protections.

In the first part of the plan, the government will create around five separate public-private partnerships, with the government investing dollar for dollar along side private capital. These partnerships will bid for the mortgage-backed securities and other assets weighing down the balance sheets of the banks, creating a price through competition.

The Federal Reserve will open up its Term Asset-Backed Securities Loan Facility for non-recourse funding for these purchases. Additional funding will be available from the TARP for these purchase.

The second part of the program uses government and private funds to purchase loans off the books of the banks. Under this program, the Federal Deposit Insurance Corp. will offer guarantees to lenders who finance the purchase of these assets. The government will also invest side-by-side with private capital in the purchases.

A bank selling the assets could be likely to finance those assets, with government guarantees.

Officials stressed the program is not a "silver bullet" and won’t solve the banking problem by itself. They said it’s part of the broader Financial Stability Plan, which includes a $75 billion foreclosure mitigation plan, the TALF, the capital access program and the bank stress tests.

For example, banks that sell assets to the private partnerships for less than the current values on their books could be required to raise capital. The capital access program will make that capital available in the form of mandatory convertible preferred that can be turned into common shares as needed.

Treasury spokesman Isaac Baker Saturday declined to comment until details of the plan are announced. Aspects of the plan, however, have been leaking out to various news organizations, including CNBC, over the past few days.

U.S. Treasury Secretary Timothy Geithner said on Sunday that help from the private sector was critical to get toxic assets off banks' balance sheets and help resolve a credit crisis.

"Our judgment is the best way to get through this is if we can work through the markets," Geithner said in an interview with the Wall Street Journal post to the Internet late Sunday. "We don't want the government to assume all the risk."

When he first mentioned public-private investment funds in February, Geithner laid out the proposal in such scant detail that markets sank on fears there was no clear-cut plan for rescuing a banking system beset by poorly performing mortgage and other assets left over from a housing boom that went bust.

Geithner said the plan could soak up as much as $1 trillion of toxic assets, which investors would buy at a discount in hope of selling at a future profit, and in the process help establish a market-driven method for pricing such assets.

-- Reuters contributed to this article