WASHINGTON — Treasury Secretary Timothy Geithner unveiled an ambitious and comprehensive plan Tuesday to revive the struggling banking sector, thaw the credit markets, spark more lending to consumers and reverse a nationwide housing slump.
Geithner took the wraps off the Obama administration's bank rescue plan an hour before the Senate was to begin voting on an $827 billion economic stimulus plan. President Barack Obama is counting on both efforts to reverse course in what economists call the worst economic downturn since the Great Depression.
Speaking in the Treasury Department's ornate Cash Room, Geithner said that federal bank regulators would be empowered to conduct "stress tests" on banks to determine their financial health. These tests could lead to moves to close banks before their problems worsen and compound the economic slowdown.
" Instead of catalyzing recovery, the financial system is working against recovery," he said. "And at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it. It is essential for every American to understand that the battle for economic recovery must be fought on two fronts. We have to both jump-start job creation and private investment, and we must get credit flowing again to businesses and families."
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Geithner acknowledged that there'll be another round of capital injections into ailing banks. The Bush administration injected almost $300 billion into 319 financial institutions, but the piecemeal effort has been heavily criticized for a lack of transparency and scant accounting of how the money was used.
The new Treasury plan imposes far greater reporting requirements for new capital injections and tougher limits on executive compensation.
The plan also has an expanded role for the Federal Reserve. The nation's central bank will aggressively buy up new issuances of complex securities whose underlying collateral is pools of car loans, student loans, credit card debt and even motorcycle loans.
Over the past two decades, lending expanded greatly as loans were pooled together and sold into a secondary market to investors in a process called securitization. The market for these asset-backed securities has gone dormant as investors have little appetite for risk. Enter the Fed, which will supplant the role of the private sector and will step in as the buyer of last resort to spark consumer lending.
The Obama administration also is preparing a comprehensive effort to help halt foreclosures nationwide, which rose 81 percent last year. At least $50 billion will be set aside to help modify distressed mortgages and prevent foreclosures, in the belief that more foreclosures lower home prices and add to the glut of homes that are on the market.
Geithner also outlined a public-private partnership to corral off distressed mortgages and other bad assets that are stuck on banks' balance sheets. The details of this effort are still being finalized, but the idea is to have the private sector, not taxpayers, purchase these assets, with some government sharing of potential losses or rewards.
The cost of the "bad bank" will be $500 billion to $1 trillion, with the government providing limited funds and loan guarantees to encourage private-sector participation.
After unveiling the plan, Geithner is expected to be grilled by lawmakers on Capitol Hill. Federal Reserve Chairman Ben Bernanke also will testify before Congress on Tuesday afternoon in a day full of economics and intrigue.
Adding to a sense of urgency over righting the economy, General Motors announced Tuesday that it's cutting 14 percent of its salaried work force — 10,000 jobs — amid a plunge in car sales and as part of a congressional mandate to revamp the company in exchange for government bailout money.