Giethner Unveils Overhauled Financial Bailout, Expands Lending Program to $1 Trillion

Treasury Secretary Timothy Geithner unveiled an overhauled version of the financial bailout plan Tuesday, announcing a program that could direct well over $1 trillion in public and private support to get credit flowing and aid struggling banks. 

The Obama administration detailed its new approach to the bailout as the Senate was preparing to vote on a more than $800 billion economic recovery package -- a separate measure aimed at saving or creating up to 4 million jobs. 

But Geither said the battle against recession must be fought on two fronts: "We have to jump-start job creation and private investment, and we must get credit flowing again to businesses and families." 

The new plan details how the administration will spend the remaining $350 billion of the $700 billion financial rescue program. But the plan goes well beyond that, envisioning big investors buying more than $1 trillion in troubled assets from the banks. 

Geithner said the program is "essential" but that the previous version under the Bush administration "was not comprehensive or quick enough to withstand the acute pressure brought on by a weakening economy." 

The new plan would bring the full force of the federal government to bear in a partnership with the private sector. 

Part of the program would create a partnership between the government and the private sector to get private investors to buy bad assets that are currently weighing down the balance sheets of banks. According to the Treasury Department, the initial scale of the plan would be up to $500 billion, with the potential to expand up to $1 trillion. 

Another part of the plan would greatly expand an effort to unclog credit markets that provide loans to consumers and businesses. Funding for this effort would see a huge increase -- from $20 billion up to $100 billion. 

If a total of $100 billion from the bailout fund were used, it would be enough to support an additional $1 trillion in lending support through a Federal Reserve program announced in November but not yet operational. 

With just those two programs, Geithner outlined efforts that could total $1.5 trillion. However, the public-private partnership to sop up bad assets would depend heavily on how much interest the private sector had in participating in the program. Details of that effort were still being worked out. 

And the projected $1 trillion partnership with the Federal Reserve to unclog the markets supporting credit card debt, auto loans, student loans and small business loans would also depend on the interest that private investors would show in participating in a program the Fed has been working since November to launch. 

Geither was also addressing concerns that the previous version of the plan doled out money with little accountability as to how it was spent. He said the administration would "fundamentally reshape" the program, attaching "strong conditions to protect the taxpayers." 

Under the plan, firms will be required to show how the government aid is expanding lending. The administration plans to post all such disclosures on the Web site, www.financialstability.gov. 

The plan would also limit executive compensation and restrict dividend payments for bailout recipients. 

Also, at least $50 billion will be included to modify mortgages for homeowners facing foreclosures. 

Sources close to the process said Treasury officials told senators that the mortgage modification program could require as much as $100 billion, and a House staff member confirmed that at least $50 billion would be spent on this program. The Obama administration will announce specific terms and details of that program within two weeks, sources said.

But investors appeared to reject the government's latest plan. The Dow Jones industrial average plunged more than 300 points in midday trading as financial stocks led the market lower, reflecting Wall Street's growing concerns about the government's ability to revive the banking industry.