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Treasury expected to unveil new entity to help buy toxic assets

March 23, 2009|Michael A. Fletcher and Anthony Faiola | Fletcher and Faiola write for the Washington Post.

The Treasury Department is expected to introduce plans today to create a government body to finance the purchase of as much as $1 trillion in toxic assets from ailing financial institutions.

The new entity would combine resources of investors along with those of the Federal Reserve and the Federal Deposit Insurance Corp. to buy those bad assets, a step seen as crucial to unclogging the balance sheets of banks and allowing credit to flow more freely.

On Tuesday, the Obama administration is expected to announce new proposals for financial regulation, executive pay, accounting standards, the structure of the International Monetary Fund and other issues ahead of a summit of 20 major nations in London on April 2.

Meanwhile, public outrage over $165 million in bonuses paid to American International Group Inc. executives has undermined support for Treasury Secretary Timothy F. Geithner at a pivotal moment.

In an interview broadcast Sunday night on "60 Minutes," Obama expressed strong support for Geithner, who has been criticized in Congress and elsewhere for what some call his halting response to the financial crisis and for not doing more to block the AIG bonuses. AIG paid the bonuses to members in its troubled Financial Products division after receiving more than $180 billion in federal bailout aid.

Still, Geithner is central to the Obama administration's plans for dealing with the global economic crisis, key portions of which are to be rolled out this week.

At the summit, leaders will seek to reach a consensus on tougher regulations and other coordinated steps meant to combat the global economic crisis and prevent a repeat. In particular, France and Germany are seeking to win assurances that Washington is committed to tighter financial regulation.

On Thursday, Geithner is scheduled to testify before the House Financial Services Committee about overhauling financial regulation. He is likely to call for giving the Federal Reserve new powers to regulate the financial system as a whole, including power to oversee any institution that is big enough or intertwined enough to pose risks to the financial system.

Congress was moving toward such steps just two months ago, and Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee, endorsed the idea. But the push has faded lately as members of Congress have become more critical of the Fed's perceived lack of accountability and its role in the takeover of AIG and bonuses paid to executives there.

The new economic proposals come as Congress is to begin debating the administration's $3.6-trillion budget proposal for next year. The spending plan, which Obama calls central to his vision for the nation's economic future, has come under intense fire over its huge price.

Also under attack are some key revenue-raising mechanisms in the proposal -- including a tax on carbon emissions and a limit on tax deductions that can be taken by high-income families -- and they face an uphill battle in Congress.

The plan to buy toxic assets will use resources of the $700-billion bank bailout fund, the Fed and the FDIC.

The initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price.

Christina Romer, head of the Council of Economic Advisors, said Sunday that it's important for investors to know that the administration is bringing a full array of programs to confront the problem.

"I don't think Wall Street is expecting the silver bullet," she said on CNN's "State of the Union." "This is one more piece. It's a crucial piece to get these toxic assets off, but it is just part of it and there will be more to come."

According to administration and industry officials, the toxic asset program will have three major parts:

* A public-private partnership to back private investors' purchases of bad assets, with government support coming from the $700-billion bailout fund.

* Expansion of a recently launched Fed program that provides loans for investors to buy securities backed by consumer debt as a way to increase the availability of auto loans, student loans and credit card debt.

* Use of the FDIC, which insures bank deposits, to support purchases of toxic assets, tapping into this agency's expertise in closing failed banks and disposing of bad assets.

Associated Press was used in compiling this report.

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