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Talks on banks' toxic debt delay Obama's recovery plan

TREASURY Secretary Timothy Geithner delayed the announcement of the Obama administration's financial-recovery plan as officials debated proposals aimed at addressing the toxic debt clogging banks' balance sheets.

Some aspects of the plan, to be announced by Geithner today in Washington, have been settled. They include a new round of injections of taxpayer funds into banks, targeted at firms identified by regulators as most in need of new capital, people briefed on the matter said. A Federal Reserve program designed to spur consumer and small-business loans will be expanded, possibly to include real estate assets, they said.

Still outstanding is the issue Geithner's predecessor failed to address: the illiquid assets that have caused the credit freeze. Officials continue to consider a so-called bad bank to buy them, perhaps in cooperation with private investors, such as hedge funds and private equity. It's unclear how big a role there'll be for federal guarantees of securities that remain on banks' balance sheets.

Banks are "looking for clarity, we're looking for this to be the complete package," Wayne Abernathy, an executive vice president at the American Bankers Association, told Bloomberg News. "If they don't have the details spelled out they will just freeze the market."

Officials on Sunday said the one-day delay was to allow the administration to focus on getting Senate approval of President Barack Obama's fiscal stimulus.

For now, the government doesn't intend to ask for more money, while leaving open the option of requesting more later. Most of the second half of the US$700-billion Troubled Asset Relief Program has yet to be allocated, an amount that economists have said is unequal to the task of shoring up the financial industry.

"Credit markets in this country are not working right" and "we'll do what is necessary" to start a process of repair, Lawrence Summers, director of the White House National Economic Council, said on ABC's This Week program on Sunday. Asked if the administration may come back to ask for more money down the road, he said: "We'll see what happens."

Geithner will try to sell the plan as a clean break from the Bush administration, while offering many of the same programs and policy tools bequeathed by former Secretary Henry Paulson.

The round of equity injections planned will contrast with Paulson's initial push to make new capital available to all banks, and the firms that get additional money will be faced with tougher terms, people briefed on the matter said.

"We've got to characterize this not as saving the banks, but saving the economy in terms of the credit that flows in this country," Senator Claire McCaskill, a Missouri Democrat, said on Sunday.


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