The Obama administration released the long-awaited details Monday of its plan to cleanse banks of bad home loans and toxic assets, igniting a major Wall Street rally as investors glimpsed what might be the beginning of the end of a problem at the core of the financial crisis.
The Dow rocketed nearly 500 points after Treasury Secretary Timothy F. Geithner briefed reporters on the administration's innovative but untested plan, which makes a strategic bet that partnering with private investors to buy the assets will stabilize the crisis while limiting the risk to taxpayers.
"We believe that this is one more element that is going to be absolutely critical in getting credit flowing again," President Barack Obama said. "It's not going to happen overnight. There's still great fragility in the financial systems. But we think we are moving in the right direction."
The new Public-Private Investment Program will use $75 billion to $100 billion in federal rescue money to lure private investors to join with the government to purchase as much as $1 trillion in bad sub-prime mortgages, mortgage-backed securities and other troubled assets that are dragging down the balance sheets of financial institutions.
With Wall Street greeting the plan optimistically, experts said the potential for generous government financing could entice investors into the troubled sector.
"I like where they're going," said Frank Pallotta, a principal at Loan Value Group in Rumson, N.J., a consulting firm that advises buyers and sellers of distressed mortgage assets. "It's a step in the right direction."
Two large money management firms, Pimco (Pacific Investment Management Co.) in Newport Beach and BlackRock Inc. in New York, said they would participate in the asset-purchase program. And the Financial Services Roundtable, which represents large banks that would put assets up for sale and private equity firms that would buy them, said it heard positive feedback Monday.
Geithner's announcement came as administration officials began laying the groundwork for Obama's trip next week to a major economic summit in London. Geithner will present a broad framework this week for improving financial regulation, including seeking authority for the government to seize and liquidate large financial institutions such as insurance giant American International Group.
On Monday, the Treasury and Federal Reserve issued a joint statement saying the central bank should play a "central role ... in preventing and managing financial crises." But congressional outrage over $165 million in retention bonuses to employees at bailed-out AIG continued to hang over the economic recovery initiatives.
Geithner and Federal Reserve Chairman Benjamin S. Bernanke are likely to face tough questioning about the bonuses and the government's commitment of as much as $182 billion to bail out AIG when they testify to the House Financial Services Committee. Responding to strong public anger, the House passed legislation last week imposing a 90 percent tax on the bonuses.
The Senate has been set to consider a somewhat different version of the bill, but action has been slowed by the administration and senators of both parties expressing reservations because of legal and policy questions about its retroactive effect.
The anti-Wall Street sentiment that has swept Capitol Hill could scare away some investors worried about being drawn into the backlash against executive compensation, experts said.
Geithner tried to ease concerns Monday among potential investors in buying toxic assets that Congress might change the rules later. To get investors to join with the government and risk buying the bad assets "will require confidence among investors [that] there's clearly established rules of the game consistently enforced going forward."
Geithner said the administration would work with Congress to strike the right balance. The administration understands the anger over the bonuses, he said, and anger at the institutions that played a part in causing the crisis by making risky investments.