Treasury Secretary Timothy Geithner on Tuesday outlined an ambitious and potentially very expensive program to revive the financial system. It could put up to $2 trillion into the economy.
Here, a look at some of the key issues the government hopes to address with its rescue plan.
What's in part two of the bank rescue plan?
Geithner said bold action is needed because "the financial system is working against recovery, and that's the dangerous dynamic we need to change." Getting credit moving again is essential, he said. In its absence, "economies cannot grow."
Some of the administration's proposals are quite specific — there will be significantly more government financing available — up to $1 trillion — to jump-start the frozen loan markets for small businesses, consumer and auto loans. But other parts of the plan — like what to do with those toxic assets paralyzing the banks — are very vague. And those toxic assets remain at the heart of the banking crisis.
Are banks getting more bailout money in this phase of the rescue plan?
Banks will be eligible for additional capital through stock purchases by the federal government. But Geithner said banks will be put through a "stress test" in order to qualify for assistance. The test would determine whether banks have enough capital to make loans and cope with losses if the economy continues to deteriorate. They wouldn't be able to keep the money on the sidelines. They would be required to cap executive compensation at $500,000; dividend payments to shareholders would be curtailed.
What about those toxic assets?
They aren't getting off bank balance sheets anytime soon. Geithner described a public-private partnership in which private investors would purchase those hard-to-value assets with some government financing. But he provided no details about how those assets would be priced, the extent of federal involvement or who the private investors might be.
Geithner says, and rightly so, that these assets — many of them tied to mortgages — present a tremendous challenge to the government and the financial system. They're causing banks to absorb enormous losses. And there's no functioning private market in which they can be sold. Some economists want the government to acquire those assets through a so-called bad bank. But the Obama administration has rejected that approach. The reason? If the government pays too much, taxpayers bear the brunt. If the government pays too little, then the banks don't get the capital they need.
So Geithner is hoping that the lure of government financing will bring private investors out of the woodwork. Theoretically, those investors would be able to determine a market price for assets like mortgage-backed securities and taxpayer risk would be limited. But there was nothing in Tuesday's proposal that provides a road map of how that will be achieved.
What's the price tag of round two?
The government could finance up to $2 trillion in the effort to shore up lending and deal with those toxic assets. Geithner said the ultimate cost to taxpayers won't approach that "headline number." For example, that $2 trillion figure takes into account participation by both the private and public sectors. And some or perhaps even most of the credit extended to banks and other borrowers would ultimately be repaid. Still, Geithner acknowledged "the strategy will cost money, it will involve risk and take time."
How about the housing crisis and the foreclosure mess?
The government is committing $50 billion to stop the flood of foreclosures. Monthly payments would be reduced for qualifying middle-income homeowners. The government is preparing a much more detailed plan that will be released in a few weeks. Geithner didn't offer any real specifics Tuesday.
How did the market react to Geithner's speech?
Not so well. The Dow fell more than 150 points after he spoke. Presumably, it was the lack of specifics in several parts of the plan that disappointed investors.