In Geithner's Overhaul, Aggressive Use of All Available Tools Expected

This may be a little "iffy," but just in case the stimulus plan is set up to directly stimulate me, I plan to send the Treasury Department my bank account number and routing number so that they can just direct deposit any stray decimal point values from the $800+ billion ready to gush out of the pipeline.

By Neil Irwin and David Cho
Washington Post Staff Writers
Sunday, February 8, 2009; 1:35 PM

The nation's top economic policymakers were putting the finishing touches this weekend on a financial rescue plan that will deploy hundreds of billions of dollars to spur the flow of credit to consumers and businesses.

The Obama administration aims to ease the financial crisis through a series of steps -- including a program to insure banks against extreme losses on mortgages, a new round of investments in banks, help for homeowners at risk of foreclosure, and the broadening of a Federal Reserve program to directly prop up lending.

The plan amounts to an overhaul of the financial rescue undertaken by the Bush administration. It was scheduled to be announced Monday, but the administration delayed the unveiling until Tuesday so it could maintain focus on getting the stimulus package approved by Congress, Treasury Department spokesman Isaac Baker said.

The plan reflects Treasury Secretary Timothy F. Geithner's philosophy of how governments should respond to financial crises. He favors aggressive use of all available tools, both to deal directly with the massive losses in the financial sector and to bolster confidence in the future. Too little government response during a severe crisis poses a greater risk than too much response, he said at his confirmation hearing.

"There's a sense that there have been too many false starts and changes of direction," said Martin Neil Baily, a Brookings Institution senior fellow and chairman of the Council of Economic Advisers in the Clinton administration. "We need a bold and sweeping comprehensive framework that will get us through this, keeping in mind it won't turn the recession around immediately."

This weekend, Treasury officials huddled in conference rooms, working through details, as did their counterparts at the Federal Reserve, the Federal Deposit Insurance Corp. and at other financial regulators, all of whom are likely to play a role in the rescue. Many of the details of what Geithner will announce remained in flux, although the broad outlines were becoming clear.

Some of the policies he plans to announce are continuations of ideas developed under former Treasury secretary Henry M. Paulson, though with new twists.

For example, there are likely to be new government investments in banks. But so far, the investments have come in the form of "perpetual preferred" stock, and the government has extracted no real control over how banks run themselves or what they do with the money.

The new approach is likely to make the investments convertible into common stock after some fixed period of time, perhaps seven years. If the banks are unable to raise private capital in that span, the government would receive more explicit control.

Moreover, banks receiving investments will have to report to the government and to the public, and the government is likely to insist that the new capital be used to expand lending. "Public assistance is a privilege, not a right," Geithner Saturday told House Democrats at a closed-door meeting in Williamsburg, Va., according to Democratic sources.

Geithner and his team have been trying to find a way to resuscitate the original idea of the Troubled Assets Relief Program, which Congress passed Oct. 3. Paulson pitched the plan to Congress as a program tobuy troubled assets off of banks' books, then changed direction and invested the money in the banks instead.

Christina D. Romer, chair of the Council of Economic Advisers, warned that if a large stimulus plan were not enacted, it would have a "catastrophic" impact on the economy. "I feel very strongly it's in our hands, that if we can get this package through, we can turn it around and be back on the road to growth," Romer said on CBS.

"The center of this stimulus bill is massive, unaccountable government spending, and the American people are tired of it," countered Rep. Mike Pence (R-Ind.) on NBC.

Administration officials have emphasized that the economy needs both the stimulus package, which is aimed at creating millions of jobs and reviving consumer spending, and the financial system rescue plan, which is supposed to loosen the credit markets that provide the loans for homes, cars and businesses.

The rescue plan will lay out how the government plans to spend the second half of the $700 billion approved by Congress in October. It will attack the core issue facing banks: the toxic assets backed by failing mortgages and other loans that are weighing down their balance sheets and freezing up the lending markets. The administration will aim a one-two punch at this problem by insuring the losses on some of the bad assets while providing incentives for private investors to buy others, sources in contact with the administration said.

The rescue package is also expected to expand a Federal Reserve program to aid the trading of assets that finance the commercial real estate and residential mortgage markets. In addition, it will lay out a way for the government to invest in banks through bonds or preferred shares that could eventually give the government partial ownership if the banks don't pay back the aid. Administration officials are expected to detail clear guidelines for how financial firms can get this money, as well as how the government will expand oversight.

But the administration is not as far along on the part of the rescue plan that would spend $50 billion to $100 billion to help homeowners and may reveal only the broad outlines of that Tuesday.

One idea being considered is to have Fannie Mae and Freddie Mac set standards for how and when lenders should modify loans for homeowners facing foreclosure, two industry sources familiar with the matter said. These sources cautioned, however, that the plan was highly fluid.

Staff writers Zachary A. Goldfarb, Renae Merle, Lori Montgomery and Shailagh Murray contributed to this report.