Geithner Unveils Plan To Purge Toxic Assets

Treasury Secretary Timothy Geithner is unveiling the Obama administration's plan to cleanse the financial system of toxic assets — the bad mortgages and securities that produced the credit crisis.

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It's MORNING EDITION from NPR News. I'm Steve Inskeep.

RENEE MONTAGNE, Host:

And I'm Renee Montagne. The Obama administration has rolled out its long- awaited plan to cleanse the financial system of toxic assets. Those bad mortgages and securities produced the credit crises that has taken much of the world into a steep recession. Administration officials say they want the federal government to work with private investors to buy up the toxic assets, but any effort to help the banks is complicated by public anger over big bonuses paid to financial executives whose companies are being propped up with taxpayer dollars.

Joining us to talk about this is NPR's Scott Horsley. Good morning.

SCOTT HORSLEY: Good morning.

MONTAGNE: Let's begin with this new plan. What can you tell us?

HORSLEY: Well, the government is planning to join forces with private investors to buy up these toxic assets. The idea is the investors will put up some money. The Treasury Department will put up some money. And then either the FDIC or the Federal Reserve will put up a lot of money to buy the assets, get them off the bank's balance sheets, so then the banks can lend more money. The private investors would only be putting up a fraction of the money, but they'd actually be the ones bidding on the assets and deciding how much those assets are worth. If they're able to buy them at a bargain price, both the investors and the government stand to make money. If they overpay and the loans or securities turn out to be less than they thought, the private investors would lose what they put up and the government would be on the hook for a lot more.

MONTAGNE: And this idea's been out there. So has the private sector embraced it?

HORSLEY: Well, Treasury Secretary Timothy Geithner said this morning he expects there will be a strong interest from private investors, although he said the investors don't want to tip their hand and look too eager because there's sort of a game of chicken going on here, with the investors wanting the government to offer as sweet a deal as possible. Now you could look at this deal and say the terms are pretty sweet, because the government is putting up the lion's share of the money, either as a direct investment or as loans. And that means for a fairly small investor - and that means for a fairly small investment from the private sector, there's an opportunity for big returns, and that raises some political risk for the Obama administration. They don't want this to look like a giveaway, either to the investors who were buying the assets or the banks who were selling them, and President Obama is sensitive to that. He knows there's a lot of frustration out there with bank bailouts, and especially the bonuses that were revealed last week. And he addressed that last night on "60 Minutes."

BARACK OBAMA: We can't govern out of anger. We've got to try to make good decisions based on the facts in order to put people back to work, to get credit flowing again.

MONTAGNE: And, of course, there has been so much anger about these bonuses, as I just suggested.

HORSLEY: That's right. And the administration is concerned about, you know, scaring private investors away from this rescue effort. Secretary Geithner said in order to get private investors to take the risk, they have to feel like the rules of the road aren't going to change on them six months down the road. And that's why there's some wariness about the legislation that passed the House last week, imposing those big, retroactive taxes on the AIG bonuses. As it stands, in this plan, the investors who take part in the program would not generally be subject to some of the compensation caps that the government has imposed on, say, the recipients of bank bailout funds. Christina Romer, who's one of the president's economic advisors, said on "Fox News Sunday": These investors would be in a very different boat than the bankers who've been the beneficiaries of government bailouts.

(SOUNDBITE OF TV SHOW, "FOX NEWS SUNDAY")

CHRISTINA ROMER: What we're talking about now are private firms that are kind of doing us a favor by coming into this market to help us buy these toxic assets off bank's balance sheets. And I think they understand that the president realizes they're in a different category. They are firms that are being the good guys, here, to try to help us get these toxic assets off banks' balance sheets.

HORSLEY: So Secretary Geithner says the administration's really trying to strike a balance between not rewarding people who don't deserve to be rewarded, and at the same time not scaring off the private sector investors that the government needs if this plan is to have a chance of working.

MONTAGNE: Although it might be a bit of a hard sell to talk about these private investors as good guys, given, you know, what has come to pass. But we heard a lot of angry talk from both Democrats and Republicans on the Sunday talk shows. Is Congress in a mood to cooperate with President Obama on this?

HORSLEY: Well, I think one of the advantages of this plan from a political point of view is that it doesn't require the administration to seek any additional money from Congress, at least not right away. There maybe some additional money needed down the road. And remember, the president's budget has a placeholder, suggesting that they may come back to Congress for another $750 billion. But in the short run, this plan relies on money that the Treasury Department has in the existing bank bailout funds. It's already been authorized by Congress, and then, as I said, a lot of leverage from the FDIC and from the Federal Reserve, which don't require Congressional approval.

MONTAGNE: Now what about the treasury secretary? Timothy Geithner introduced the plan this morning, and he's come in for a lot of criticism over these last days.

HORSLEY: Well, that's right. And actually, really, throughout his tenure as treasury secretary. Remember, when the initial bank - when the initial financial rescue plan was rolled out last month, Timothy Geithner, his performance in front of a live audience was panned. The stock market tanked. There was not enough details in the plan. The initial reaction from the stock market today has been very positive, and the administration didn't put Tim Geithner in front of the cameras this morning. He didn't give a formal speech. He had an off-camera briefing with reporters, and that will then be followed with a photo-op with the president, who continues to express his complete confidence in Treasury Secretary Geithner.

MONTAGNE: Scott, thanks very much.

HORSLEY: My pleasure, Renee.

MONTAGNE: NPR's Scott Horsley.

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