A rescue plan for the teetering financial system, likely to impose restrictions and provide relief to homeowners, is to be unveiled Monday by President Barack Obama's administration.
The "comprehensive financial stability plan" to be announced by Treasury Secretary Timothy Geithner at a news conference is expected to revamp the massive 700-billion-dollar Troubled Asset Relief Program (TARP), designed to avert bankruptcies and get credit flowing again.
"Secretary Geithner will discuss the Obama administration's strategy to strengthen our economy by getting credit flowing again to families and businesses, while imposing new measures and conditions to strengthen accountability, oversight and transparency in how taxpayer dollars are spent," his office said in a statement.
The plan will provide capital to financial firms but with tougher rules this time, The Wall Street Journal reported. To provide relief to struggling homeowners, the plan will propose national rules to modify loans adopted by mortgage giants Fannie Mae and Freddie Mac. And it may also introduce a way to calculate the value of homes facing foreclosure to help expedite negotiations with borrowers, the Journal said. The daily also reported that Geithner was considering a plan to help purge banks of their bad bets by partnering with the private sector to buy troubled assets.
The so-called "aggregator bank" would be funded in part by the 700 billion dollar financial-sector bailout, but most of the financing would come from the private sector, people familiar with the proposal told the daily. The TARP was approved by Congress in early October at the urgent request of George W. Bush's Republican administration. But many analysts argue more is needed to revive credit flows in the face of a deepening recession.
To help clean up the balance sheets of banks, the government would convert preferred shares it received from many financial firms into common stock, effectively swapping debt for equity, according to The New York Times.
The Times said the blueprint would provide incentives for investors to buy troubled assets from banks, possibly in the form of commitments to absorb losses from any assets purchased.
Although no major bankruptcy like those of Lehman Brothers and Washington Mutual, both in September, has occurred since TARP's passage, the banking sector remains in critical condition. The spending of public funds to shore up banks has sparked a storm of controversy among politicians, financial circles and economists over whether it is really an effective stabiliser and, if so, what direction it should take.
Speculation has been all over the map about what Geithner will announce. The Times said the new plan does not include a government "bad bank" to buy up toxic assets from financial firms, an idea floated in recent weeks.
Instead, the Treasury may move to expand the role of the Federal Reserve's asset-backed securities loan facility, to cover assets in addition to the student, credit-card and car loans it was set up to handle. That program was launched to bolster the market for consumer loans.
Support has grown for a government guarantee against future losses of troubled banks, in an arrangement that bailed out Citigroup in November and Bank of America in January. Speculation also has zeroed in on the government's guarantee of certain bank losses, the conversion of the government's preferred shares in rescued banks into common shares and outright nationalizations.
But last week, Geithner said his team would "like to do our best to preserve" the private US banking system, and that it was "looking at a range of options."
Obama, who since taking office on January 20 has been laser-focused on driving a massive economic stimulus plan through Congress, has given few hints about his financial policy.
Wednesday, Obama announced that top executives of finance firms receiving new government bailouts would have their annual salaries capped at 500,000 dollars, a move aimed at protecting taxpayer interests.