Feds planning battle against banking crisis

WASHINGTON (AP) — Treasury Secretary Timothy Geithner said Tuesday the new administration will wage an aggressive battle against the worst financial crisis in seven decades through programs designed to increase consumer lending and remove toxic assets from banks’ balance sheets.

But analysts said they were disappointed by the lack of details in the plans, and investors appeared wary. The Dow Jones industrial average plunged as financial stocks led the market lower, reflecting Wall Street’s concerns that the government’s latest plans aren’t enough to revive the banking industry.

The new efforts are part of the government’s major overhaul of the widely criticized $700 billion financial rescue program.

The Federal Reserve said it would expand the size of a key lending program to as much as $1 trillion from $200 billion. The program, which has yet to begin operations, is designed to boost resources for consumer credit and small business loans.

The Fed said the program would be expanded to cover the troubled commercial real estate market and certain residential mortgages.

“Right now critical parts of our financial system are damaged,” Geithner said. “Instead of catalyzing recovery, the financial system is working against recovery and that’s the dangerous dynamic we need to change.”

Geithner said the loss of 3 million jobs last year, and another 600,000 just last month underscored the urgency for government action.

“It is essential for every American to understand that the battle for economic recovery must be fought on two fronts,” Geithner said in a speech in Treasury’s ornate Cash Room where he unveiled the administration’s new plan.

“We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families,” he said.

Geithner pledged to “fundamentally reshape” the bailout program with the effort guided by the lessons of financial crises throughout history.

The administration’s new plan will greatly expand an effort to unclog credit markets that provide loans to consumers and businesses. This effort will see a fivefold increase in bailout funding 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 the Fed’s program, known as the Term Asset-Backed Securities Loan Facility, the administration said.

The administration also unveiled a program to create a partnership between the government and the private sector to get private investors to buy bad assets that are currently weighing down banks’ balance sheets. Geithner said the program initially will aim to support the purchase of $500 billion in bad assets, but could ultimately support up to $1 trillion in purchases.

Geithner said he realized the financial rescue represented a sizable commitment but noted that many of the amounts were loans and loan guarantees, which means the government eventually will be repaid.

Still, the country should know that the program will involve costs to the government and risks, but he said the alternative of doing nothing would be far riskier.

Congressional aides said the administration was looking at possibly providing guarantees to investors who purchase the toxic assets or using the Fed’s resources to lower their borrowing costs.

But Christopher Whalen, managing director of Institutional Risk Analytics, said the new plan doesn’t aggressively tackle the issue of how to get the toxic assets off banks’ books so they’ll start lending again.

“We’re still not dealing with the core issue,” he said. “It’s more incremental thinking.”