WASHINGTON -The Treasury Department will unveil the next step in its financial rescue efforts today, announcing that it intends to create a government body called the Public Investment Corp. to finance the purchase of as much as $1 trillion in soured loans and toxic assets from ailing banks, according to sources.
The plan calls for the new entity to combine its resources with the Federal Deposit Insurance Corp., the Federal Reserve and private investors to buy those loans and other assets. But the government will put far more money into the deals and take on more risk than the investors, which could include hedge funds, private-equity firms, pension funds and foreign investors with U.S. headquarters, the sources said. The corporation will be funded with $75 billion to $100 billion from the $700 billion financial rescue package.
Key details of the toxic asset purchasing program are not yet final, said officials in contact with the Treasury. Some expressed concern that the markets would expect too much out of today's announcement. When Treasury Secretary Timothy Geithner first sketched out the administration's rescue plan last month, he was criticized on Wall Street and on Capitol Hill for being too vague and creating uncertainty in the markets.
The Obama administration also risks a backlash from lawmakers and ordinary Americans who expressed outrage over $165 million in bonus payments by American International Group to employees of its most troubled unit after the firm received more than $170 billion in federal aid.
White House officials said they are seeking a solution to the AIG bonus controversy in light of a bill the House passed Thursday that would impose punitive taxes on bonus payments at all financial firms. Industry officials say the House measure would scare off many banks from taking government aid because the majority of their employees receive bonuses. The banks could still survive, but without federal assistance they would not have enough capital to restart lending, which is considered central to reviving the economy.
The administration's goal, one senior official said, is to pursue compensation reform that addresses public outrage while maintaining stability in the financial system.
The toxic asset initiative is only one piece of the administration's financial rescue package, which includes efforts to stabilize banks, aid the consumer credit markets and provide relief for struggling homeowners to head off foreclosures, a Treasury official said.
"Our singular focus is on increasing lending to support economic recovery. Everything we do to stabilize the financial system is done with that goal in mind," added Stephanie Cutter, a Treasury adviser to Geithner. She declined to discuss details of the plan. "Ridding bank balance sheets of problem assets is the next step in that process, but it alone won't solve the credit problem."