Wall Street Slams Plan With Sell-Off
Geithner Vows Bold Action But Offers Scant Details On Mortgages, Toxic Assets

By David Cho and Lori Montgomery
Washington Post Staff Writers
Wednesday, February 11, 2009

Treasury Secretary Timothy F. Geithner vowed yesterday to bring the "full force" of the U.S. government to battle the financial crisis, assembling an unprecedented coalition of agencies and mustering federal resources on a scale rarely seen except at wartime. But the lack of detail in his plan dismayed lawmakers and investors, triggering a steep sell-off on Wall Street.

Treasury officials said they would commit $1.5 trillion in public and private funds, just for starters -- with the possibility of more than $2 trillion -- to aid banks, unfreeze consumer credit markets and stem the soaring foreclosure rate.

How Geithner would accomplish some of those tasks remained unclear yesterday. The Treasury Department provided only the most general descriptions of how struggling homeowners and small businesses would be helped. And officials said they have yet to design a program that is a core part of the plan: A public-private initiative that would encourage investors to buy up the toxic assets now weighing down the books of banks and threatening to overwhelm the firms with losses.

Cleansing the financial system of these assets, which are backed by failing mortgages and other troubled loans, has vexed officials since Congress approved the $700 billion rescue package in October. But financial analysts said Geithner, who took a strong hand in casting the new plan, appeared to have no better grasp on a solution than his predecessor, Henry M. Paulson Jr.

"What they did is over-promise and under-deliver," said Thomas Barrack, chief executive of Colony Capital, a private investment firm in Los Angeles. "They said there was going to be a plan, so everybody expected a plan. And there was nothing."

Minutes after the plan was made public, stock markets plummeted. The Dow Jones industrial average ended the day down 4.6 percent. The Standard and Poor's 500-stock index, a broader measure, fell 4.9 percent.

Lawrence H. Summers, director of the National Economic Council, said the reaction by the stock markets should not be a black mark on the administration's rescue plan.

"You cannot judge policy by market responses. It's the wrong objective. It's the wrong measure," Summers said in an interview. "The president has made it clear that the focus of our economic policies is on financial and economic performance over time, not day-to-day fluctuations in markets."

In unveiling his plan, Geithner did not ask Congress for more than the roughly $320 billion that remains in the Treasury's initial rescue package for the financial system, known as the Troubled Assets Relief Program, or TARP. For now, the balance of the money to fund the new effort, called the Financial Stability Plan, would come from the Federal Reserve and other government agencies, as well as private-sector contributions.

But in a hearing before the Senate Banking Committee, Geithner indicated that such a request may be on its way.

"I'm not standing here before you today to ask you to authorize more resources," he said. "I want to be candid, though, that I think this is going to be an expensive problem for the nation, and it's going to require substantial resources."

Geithner announced a multipronged strategy that attempts to address the problems of the traditional banking sector, the credit markets that provide financing to banks, as well as homeowners and small businesses.

He promised the overall response to the crisis would be "forceful."

"We believe that policy has to be comprehensive," Geithner said. "We believe that the United States has to send a clear and consistent message that we will act to prevent the catastrophic failure of financial institutions that would damage the broader economy."

An initiative to help small businesses and community banks would be detailed in the next several days, Treasury officials said. They did not reveal the cost of the program.

A second program would broaden the scope of a Federal Reserve initiative aimed at unclogging the credit markets for auto, student and other consumer loans. That initiative may expand the program to as much as $1 trillion, using $100 billion from the Treasury's rescue funds, and include aid for commercial real estate mortgage markets.

The Treasury will also offer direct help to at least two dozen of the nation's largest banks that hold more than $100 billion in assets. Regulators, using uniform standards, are planning to conduct a review of these firms to determine how much they may need. Any federal aid would come with conditions giving the banks incentives to pay the money back as soon as possible. The review would determine the ultimate price tag of this program.

Treasury officials said a major aim of this "stress test" is to help regulators figure out whether these firms could withstand a downturn even worse than the current one, administration officials said.

Another goal of this test would be to shed light, for the first time, on the true extent of the toxic asset problem inside the banking system. Many financial analysts have concluded that the current values banks have assigned to these assets are much higher than they are worth. But if banks wrote them down to their actual value, many of the firms could collapse.

Based on this examination, the government could determine how much aid to provide banks and calculate what it would take in terms of low-cost financing and other incentives to get private investors to buy the assets, the source said.

Because the design of this program has yet to be formulated, officials yesterday provided only broad outlines of the plan.

Federal Reserve Chairman Ben S. Bernanke told lawmakers yesterday that the central bank would strive to keep the public better informed about efforts to combat the financial crisis.

Another initiative to help homeowners facing foreclosure is not expected for at least a week and may be announced by President Obama instead of the Treasury. Treasury officials said they would spend $50 billion on this effort, the low end of the range provided by the administration last month.

Lawmakers in both parties said they were surprised and displeased by the administration's decision to wait another week or two before unveiling a program to help struggling homeowners. With nearly 10,000 families a day falling into foreclosure, several lawmakers said the timeline Geithner suggested is too long to wait.

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said he was concerned about the delay in the foreclosure plan, as well as the likelihood that $50 billion "understates the amount that we will need."

In a statement, Frank called on the administration for "some assurance that, assuming this works as we hope it will, there will be more money available" for foreclosure reduction. In the meantime, he reiterated his call for banks and other mortgage holders to halt foreclosure proceedings while awaiting details of the administration's plan.

The housing plan would set a government standard for the help homeowners should receive. That would end the hodgepodge approach under which lenders now rely on varying rules about how much and what type of help homeowners can receive.

Other lawmakers said they were perplexed by the lack of detail in the overall plan, both in Geithner's public comments and in private briefings arranged for key congressional staff members late Monday.

The "vague plan" makes it "evident to me that there's still dissension in the White House about what to do. And that roiled the markets," said Sen. Bob Corker (R-Tenn.), a member of the Senate Banking Committee who voted to create the TARP bailout program last fall. "It would have been better for the country had they waited till they had some clarity. What was announced today was more platitudes."

The committee's chairman, Sen. Christopher J. Dodd (D-Conn.), suggested by his questions that even the goals were unclear.

"What is the framework? What is the purpose here? And what do you hope to attain?" Dodd said.

The senior Republican on the panel, Sen. Richard C. Shelby (R-Ala.), grumbled that the proposal looked suspiciously like "son of Paulson," a reference to former Treasury secretary Henry M. Paulson Jr., whose administration of the first half of the TARP money, in Shelby's view, has failed.

Geithner insisted that his proposal is "fundamentally different" from Paulson's approach. But he acknowledged that the administration has laid out only "the broad architecture" of a plan, and said Treasury officials will return to Congress with more information, as well as proposals for legislative changes.

Staff writer Renae Merle contributed to this report.

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