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Next up: Overhaul of financial industry

Associated Press / March 23, 2009
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WASHINGTON - The Obama administration's latest attempt to tackle the banking crisis and get loans flowing to families and businesses would create a new government entity, the Public-Private Investment Program, to help purchase as much as $1 trillion in toxic assets on banks' books.

The new effort, to be unveiled today, will be followed tomorrow with the administration's broad framework for overhauling the financial system to ensure the current crisis - the worst in seven decades - is not repeated.

A key part of that regulatory framework would give the government new authority to take over troubled institutions that would pose a threat to the entire financial system if they failed. Administration officials believe this new power will save taxpayers money and avoid the type of controversy that erupted last week when insurance giant American International Group paid employees of its troubled financial products unit $165 million in bonuses - even though the company had received more than $170 billion in support from the federal government.

Under the new powers being sought by the administration, the Treasury secretary could seize a firm only with agreement of the president and the Federal Reserve. The Treasury secretary would have power to limit payments to creditors and to break contracts governing executive compensation, a power that was lacking in the AIG case.

The plan on toxic assets would use the resources of the $700 billion bank bailout fund, the Federal Reserve, and the Federal Deposit Insurance Corp.

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 would share the risks if the assets fall further in price.

When Geithner released the initial outlines of the administration's overhaul of the bank rescue program on Feb. 10, the markets took a nosedive. Investors expressed disappointment about a lack of details.

Christina Romer, head of the Council of Economic Advisers, said it's important for investors to know the administration is offering 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."

But private economists said investors may still have doubts about whether the government has adequate resources to properly fund the plan and whether private investors will participate, especially after last week's uproar about the AIG bonuses, which has added to anti-Wall Street feelings in the country.

Romer said the toxic asset program would utilize about $100 billion from the $700 billion bailout fund, leaving the fund close to being tapped out.

Mark Zandi, an economist at Moody's Economy.com, estimated that the government will need an additional $400 billion to adequately deal with the toxic asset problem, seen by many analysts as key to finally resolving the banking crisis.

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