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US to get funds to buy toxic assets

The Obama administration yesterday launched its much-awaited assault on the worst United States banking crisis in 70 years and a credit freeze that is pushing the economy ever deeper into recession.

Treasury Secretary Timothy Geithner's banking plan will use low-interest loans and between US$75 billion and US$100 billion of what's left of the government's US$700-billion bailout fund to entice private sector investors to initially buy about US$500 billion in toxic assets ?? taking them off the books of the nation's banks.

The administration also said the initial effort could grow to US$1 trillion, as the program proves successful in attacking the problem that has stifled bank lending to consumers and business, compounding the worsening global downturn.

In a lengthy fact sheet, the administration said it expects participation from a broad array of private sources, ranging from pension funds to insurance companies and other long-term investors.

The Federal Reserve and the Federal Deposit Insurance Corp, an independent agency of the government that backs bank deposits, will have large roles in putting up the needed cash.

But the program may face stiff resistance as it debuts after a week of Wall Street-bashing in Congress, where lawmakers were outraged over troubled insurance company American International Group Inc paying US$165 million in bonuses after taking more than US$170 billion in government funds to stay afloat.

US President Barack Obama, who expressed outrage over the payouts, has, nevertheless signaled, opposition to a quickly-passed House of Representatives measure to tax such bonuses at 90 percent. In a CBS television interview broadcast on Sunday he questioned the bill on constitutional grounds.

Geithner, meanwhile, wrote in yesterday's Wall Street Journal that the new bank program aimed to "resolve the crisis as quickly and effectively as possible at the least cost to the taxpayer. ... Simply hoping for banks to work these assets off over time risks prolonging the crisis."

The government has been struggling since the credit crisis hit to find a way to sop up the bad assets.

The Geithner banking plan was designed to resolve the vexing problems of how to price the bad bank assets while showing the government has sufficient capital to make a difference.

The administration hopes the market reaction to this proposal proves more favorable than Geithner's initial broad outline for the overhaul on February 10, when investors, upset with a lack of detail, sent the Dow Jones industrial average tumbling that day.

European and Asian markets climbed ahead of yesterday's announcement and Wall Street futures pointed to a sharply higher open.

To encourage investors to be more supportive, the government is offering sizable financial enticements, from shouldering much of the financial risk to providing low-interest loans to purchase the assets. Some hedge funds and other investors are reluctant to participate in the new program for fear Congress will subject them to onerous curbs on executive compensation.


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