Detox for Troubled Assets

The funds would use the money to buy toxic assets from banks. The private investors would manage the funds and determine how much to pay for the assets. That would allow the government to benefit from their expertise and desire to maximize profits.

The plan emerged from discussions about creating a "bad bank," in which a company's troubled assets are split off and placed in a new company, leaving behind a "good bank." Bair said the term "bad bank" was misleading because the structure of the deal should benefit both sellers and buyers.

"You end up with two healthy institutions," she said. "It's not a good bank and a bad bank; it's an aggregator bank with good upside potential because it bought at good discounts and you've got a clean balance sheet over here with an opportunity to raise private capital."

Bair emphasized that banks forced to take large losses might not need more government money because, newly cleansed, they would be in position to raise money from private investors. She said the size of the write-downs actually could be a positive, by establishing that banks are free of their problems.

"The thing that really makes people gulp about this is the size of the hole, but we view that as a strength and not a weakness," she said.

Other banks could be forced to raise money from the government. And she said it was possible that some banks would take losses too large to survive.

A key issue that has derailed past plans to buy troubled assets is the large gap between the prices banks consider fair and what investors are willing to pay.

Bair said part of that gap reflected the cost of borrowing money, because fear continues to hang over the financial markets. She said the government can eliminate that portion of the difference by providing low-cost financing.

"One of the reasons that prices are distressed right now is because of the lack of financing to make purchases," Bair said. "The government, by providing low-cost funding, it will help to tease out that liquidity premium from the pricing and hopefully get the pricing a little higher."

Even so, the losses faced by banks could be steep, raising the question of how many banks will be willing to participate. The government already has made it easier for banks to borrow money and has provided banks with fresh capital. Some banking executives have questioned why they should sell assets at a loss rather than simply hold them and wait for prices to improve.

General Electric's finance arm, which had been seeking to sell some commercial loans, is no longer looking for buyers. Morgan Stanley also decided not to sell commercial and subprime mortgages it had once considered selling.

Staff writers David Cho and Steven Mufson contributed to this report.