Geithner's new bank bailout: Private investors hold the key

So far, infusions of capital into many of the largest banks since October appear to have calmed credit markets somewhat, but they have not removed fundamental uncertainty about the solvency of major banks.

Geithner said the new rescue plan comes with a new name, the “financial stability plan,” to replace the Bush administration’s so-called Troubled Assets Relief Program, or TARP.

He pledged to safeguard taxpayer interests. But he acknowledged the exposure that taxpayers face in such a huge rescue effort.

“This strategy will cost money. It will involve risk, and it will take time,” Geithner said Tuesday. Yet the cost to the economy of risking a financial system collapse by not acting, he said, would be “incalculable.”
He left many details to be filled in during coming weeks, and the stock market reacted by falling sharply during his speech.

Part of Geithner’s challenge may be to avoid mixed signals. He cited the risk of a gradualist approach to the crisis, yet said the administration’s comprehensive plan would inevitably evolve and adapt over time.
America’s current banking troubles are centered in the very largest institutions. Ninety to 95 percent of the nation’s 8,000 banks should be able to manage their way through the recession, say banking analysts.

The biggest banks, however, account for most of America’s banking assets. Citigroup and Bank of America, in particular, have required more than one infusion of federal assistance already.

They are considered “too big to fail,” and the Obama administration officials have said they hope to avoid nationalizing big banks.

Some finance experts, however, say some form of forceful intervention at large banks will be necessary. Banks may need to write down bad assets, receive new public capital, and see the US government get an equity stake as compensation.

Avoiding such decisive action “is never a good solution,” says Joseph Mason, a finance expert at Louisiana State University in Baton Rouge. “Forbearance is a strategy for worsening the crisis.”

The administration’s plan to spur new lending will greatly expand an existing program run by the Treasury and the Federal Reserve, called the Term Asset-Backed Securities Loan Facility. If $100 billion from the bailout fund were used, it would be enough to create an additional $1 trillion in lending, Geithner said.

The other big program, regarding banks’ bad assets, would create a partnership between the government and the private sector to get private investors to buy those assets. A key question is what kind of incentives, such as insurance against losses below a certain amount, will the US give those investors? Geithner said the program ultimately could support up to $1 trillion in purchases.

– Gail Russell Chaddock and the Associated Press contributed to this report.

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