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Buying toxic assets to boost lending

Struggling to contain the worst financial crisis in seven decades, the Obama administration wants to buy billions of dollars of toxic assets from banks to ease borrowing for consumers and businesses.

Some industry officials familiar with the details said on Saturday they expected the approach would try to remove as much as US$1 trillion from banks' books. An announcement from Treasury Secretary Timothy Geithner could come as early as today.

If banks are not burdened by the soured loans, then they would be in better shape to resume more normal lending.

According to administration and industry officials, the plan would rely on the Federal Reserve and the Federal Deposit Insurance Corp to supplement the government's US$700 billion bailout fund. The uproar over the millions of dollars in bonuses for employees at troubled insurance giant American International Group Inc has dimmed prospects for getting more bailout money from Congress.

The officials, who spoke on condition of anonymity because the details have not been announced, said Geithner's plan will have three major parts:

a public-private partnership to back private investors' purchases of bad assets. The US$700 billion bailout fund would provide the backing. The government would match private investors dollar for dollar and share any profits equally.

expanding a recent Fed program that provides loan for investors to buy securities backed by consumer debt. It's an effort to make it easier for people to get auto, student and credit card loans. The Term Asset-Backed Securities Loan Facility program is getting up to US$100 billion from the bailout fund; that money then is being leveraged to support up to US$1 trillion in Fed loans. Under Geithner's plan for the toxic assets, part of that US$1 trillion would now go to support purchases of banks' troubled assets.

using the FDIC, which guarantees bank deposits, to purchase toxic assets. Officials said the agency would create special investment partnerships and then lend them money to buy up troubled assets.

Industry officials said the administration had not disclosed to them the exact amounts of money to be devoted to the effort.

"The key is going to be if the government buys these assets quickly," said Mark Zandi, chief economist at Moody's "The sooner they get these assets off banks' balance sheets, the quicker the system will find its footing and get the economy moving again."

Geithner's announcement last month of the financial rescue overhaul was widely panned by investors. The Dow Jones industrial average plunged by 380 points in large part because investors were disappointed that Geithner did not have more details.

Some analysts worry the market may once again be underwhelmed, in part because not enough resources will be devoted to the problem.

"The market is looking for a 'wow' factor where they can see the administration is finally doing enough," said Sung Won Sohn, an economics professor at the Smith School of Business at California State University.


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