WASHINGTON AND LOS ANGELES — The Obama administration's long-awaited plan to cleanse banks of rotten investments tied to bad home loans scored a big win on Wall Street on Monday as investors bet that the government may have finally found a way to fix the nagging problem at the core of the financial crisis.
The Dow Jones industrial average soared nearly 500 points after Treasury Secretary Timothy F. Geithner detailed the administration's innovative but untested plan for the government to invest alongside private firms to buy as much as $1 trillion of the troubled assets clogging the balance sheets of financial institutions.
Skeptics said it wasn't clear that enough investors would step up -- or that banks would be willing to unload assets at the prices offered. But a banking trade group sounded a note of optimism. And some of the country's biggest investment firms expressed support for the program and said they planned to participate.
"This is perhaps the first win-win-win policy to be put on the table," because investors, struggling banks and taxpayers all could come out ahead under the plan, said Bill Gross, co-chief investment officer of money management giant Pimco in Newport Beach.
The assets to be acquired consist of individual home loans as well as securities backed by pools of mortgages. Those assets have plummeted in value since the housing market peaked, eating into banks' capital and making them less willing to lend money and less able to raise new capital.
By giving the banks a way to unload the assets, the Obama plan could boost available funding for all kinds of loans.
"We believe that this is one more element that is going to be absolutely critical in getting credit flowing again," President Obama said. "It's not going to happen overnight. There's still great fragility in the financial systems. But we think we are moving in the right direction."
Under the complex plan, the Treasury Department would use $75 billion to $100 billion from its $700-billion financial-system rescue fund to invest in a series of joint ventures with private investors.
With low-cost government financing -- loans from the Federal Reserve or loan guarantees from the Federal Deposit Insurance Corp. -- the joint ventures would buy as much as $500 billion in bad subprime mortgages, mortgage-backed securities and other troubled assets. Geithner said the size of the program could be doubled to buy $1 trillion in assets.
