New bank bailout may top $1.5 trillion

WASHINGTON – The enormity of the crisis confronting the Obama administration as it seeks to right the financial system will come into stark focus today when officials unveil a three-pronged rescue program that may commit up to $1.5 trillion in public and private funds, and possibly more, lawmakers and other officials said.

In announcing the plan, Treasury Secretary Timothy Geithner will not ask Congress for more funds than the roughly $350 billion that remain in the Treasury Department’s original rescue package for the financial system, though congressional sources said such a request could come later if the new programs are unsuccessful. The rest of the money would come from other government agencies, such as the Federal Reserve, as well as private-sector contributions.

A senior administration official warned Monday night that the ultimate cost to taxpayers has not been determined. Several of the programs have not been finalized, and most are designed to ultimately return money to taxpayers.

Geithner plans to announce a public-private partnership that would seek to finance the purchasing of toxic bank assets that are at the heart of the credit crisis, congressional sources and other officials said. These sources briefed by Treasury officials said the program initially may cost up to $500 billion or more in public and private funds. The government, they added, would offer low-cost financing to encourage investors to buy the toxic assets. An administration official said the proposal is still subject to a public review and may not take final shape for several weeks.

A second initiative will expand a Federal Reserve program aimed at unclogging the markets for auto, student and other consumer loans. That initiative will expand to $1 trillion, using $100 billion from the Treasury’s rescue funds, and include aid for commercial real estate markets.

A third program would offer direct help to the nation’s largest banks. The government plans to conduct a review of major financial firms to determine what aid they may need. Any federal help would come with conditions that would give the firms incentives to pay the money back as soon as possible. The review would determine the ultimate price tag of this program.

The primary goal of the bank-by-bank examination is to help regulators figure out whether these firms could withstand a downturn even worse than the one currently afflicting the economy, administration officials said.

This “stress test” would also help determine whether the nation’s major banks have enough capital to continue lending and help regulators set uniform values for the toxic assets clogging their books.

“Right now, part of the problem is that nobody really knows what’s on the banks’ books,” President Barack Obama told reporters at a news conference Monday night. “Any given bank, they’re not sure what kinds of losses are there. We’ve got to open things up and restore some trust.”

If these large banks receive federal aid, they would be subject to tougher conditions than the Bush administration imposed and be required to submit reports to prove they are using the aid to do more lending.

They would be banned from using government funds to pay dividends above a penny or buy healthy firms until the government investment is repaid. Their chief executives would face pay restrictions that would limit their annual take to $500,000. Any compensation above that could come only in the form of stock that could not be sold until the loan is returned.

Geithner’s announcement was originally intended to include a fourth proposal, aimed at stemming the soaring rate of foreclosures. But officials said that plan will be unveiled in about a week. Lawmakers said this program would use about $50 billion in rescue funds, the low end of the range provided by the Obama administration last month.

James Lockhart, director of the Federal Housing Finance Agency, said in an interview that the Obama team has developed the broad outlines of a proposal to stem foreclosures by adding incentives for borrowers and lenders to modify home loans that have fallen behind, perhaps by as little as a single month.

The foreclosure relief effort has taken more time to design. Lockhart said it would be a “more aggressive version” of the one launched by mortgage financiers Fannie Mae and Freddie Mac last year. But senior officials are still hammering out the details, he said.

Both lenders and borrowers have been frozen by the perception that the government may continue to unveil new and better modification programs, he said.

“The early returns show that we may need to be more aggressive” than plans already announced, he said. But the government also needs to send a message to lenders that its new approach would represent the “best and final” offer.