U.S. Delays Financial Plan as Officials Grapple With Toxic Debt

By Rebecca Christie and Robert Schmidt

Feb. 9 (Bloomberg) -- 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 tomorrow 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,” said Wayne Abernathy, an executive vice president at the American Bankers Association in Washington. “If they don’t have the details spelled out they will just freeze the market.”

Delayed Speech

Officials said yesterday the one-day delay was to allow the administration to focus on getting Senate approval of President Barack Obama’s fiscal stimulus. Still, the announcement coincided with continued discussions on the details of the plan. Geithner is scheduled to unveil the effort at 11 a.m. tomorrow.

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 $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 television’s This Week program yesterday. 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.

Differentiating From 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 yesterday on NBC’s Meet the Press.

The Federal Deposit Insurance Corp. is expected to play a role either running or financing some bad bank type of unit that takes on illiquid securities, which may sell its own government- backed debt, the people said.

Also this week, officials may seek to boost the FDIC’s credit line with the Treasury to $100 billion from $30 billion. The FDIC’S deposit-insurance fund is diminishing as it takes on more failed banks.

Asset Guarantees

Geithner’s plan may include an asset-guarantee element similar to previous deals arranged for Citigroup Inc. and Bank of America Corp., while it’s not clear how big a role such insurance would play in tomorrow’s announcement, the people said.

The new approach comes four months after the start of the $700 billion TARP, which both Democrats and Republicans have criticized as ineffective. The task Geithner faces is reviving a U.S. banking system throttled by $752 billion in credit losses and an economy that lost almost 600,000 jobs last month.

Economic news this week is expected to show a further deterioration. Sales at U.S. retailers probably fell in January for a seventh straight month, capping the longest slide since comparable records began in 1992. The Commerce Department report will probably show purchases declined 0.8 percent, according to the median estimate in a Bloomberg News survey.

A Labor Department report last week showed the U.S. unemployment rate climbed to 7.6 percent, its highest level since 1992. White House Council of Economic Advisers Chairman Christina Romer warned last week that the rate may climb to 10 percent or higher without approval of Obama’s stimulus package, which exceeds $800 billion.

Stock Slide

With the economic downturn deepening, attracting private money to the financial industry may be difficult. The Standard and Poor’s 500 Banks Index has fallen 35 percent since the start of last month, and 66 percent in the past year.

Bank of America plunged 57 percent in the past month, closing at $6.58 last week even after the government agreed to backstop a portfolio of more than $100 billion of its assets. Citigroup, which got a joint federal guarantee for investments in excess of $300 billion, closed at $3.91.

The Obama administration will seek to “catalyze and spur private investment” to help solve the crisis, Summers said in an interview on Fox News Sunday yesterday.

Housing programs will be a key element of the administration’s plan, though may be announced separately from the bank-rescue rollout. House Financial Services Committee Chairman Barney Frank said yesterday that Obama will steer “substantial” funds to stem foreclosures as the administration prepares to unveil its plan for stabilizing the economy.

“A major part of what you’re going to see from the Obama administration is an effort to put substantial money into reducing foreclosures,” Frank, a Massachusetts Democrat, said on NBC’s “Meet the Press.”

To contact the reporter on this story: Rebecca Christie in Washington at rchristie4@bloomberg.netRobert Schmidt in Washington at rschmidt5@bloomberg.net.