February 10, 2009 Geithner promises major overhaul of bailout plan Play video

(Peter Howe, NECN) - President Obama's Treasury Secretary, Timothy Geithner, is vowing to reshape to reshape the $700 billion dollar bailout passed by Congress last fall. When Geithner inherited the Troubled Assets Relief Program, or TARP, he inherited a deeply unpopular program. Many American taxpayers resent all the money being showered on bankers, the many twists and turns in the intended purpose of TARP since it passed in early October, and don't yet see evidence it's even working.

Geithner is promising a major overhaul: New efforts to get private sector capital involved and help more homeowners in mortgage trouble avoid foreclosure.

"We will have to try things we never tried before. We will make mistakes. We will go through periods in which things get worse,'' Geithner said in a speech in Washington Tuesday that set sober expectations. But Geithner promised he will work aggressively to make the second half of the $700 billion program work much better than the first.

What was about as expected: The Obama administration's committing TARP money for home foreclosure prevention, at least $50 billion, and also billions more in TARP funds for buying more stock in banks -- if they pass new "stress tests" aimed at guaranteeing they are financial sound.

The surprise from Geithner was his promise taxpayer money can help create two huge public private investment funds: $1 trillion to buy so-called toxic mortgage backed bonds -- the original idea of TARP

-- and a second $1 trillion fund to buy securities backed by car loans, credit card, student and other loan. The intention there is to unfreeze those markets and thereby increase lending of many different kinds to consumers. Obama administration officials predict just 10 percent of the second $1 trillion fund would be taxpayer money, 90 percent from private investors.

In working with the Federal Reserve and Federal Deposit Insurance Corp. to set up what he calls "a public-private investment fund to leverage private capital,'' Geithner said: "We're exploring a range of different structures, and we'll seek input from the public as we design the program. .... We will expand it based on what works.''

Cornelius Hurley, who runs the Morin Banking Law Center at Boston University and was a top Federal Reserve lawyer, has a simpler word for "public-private investment pool."

"It's like a traditional bank,'' Hurley said, "where the federal government is the major shareholders.'' Hurley said he does thin "the money is out there" from private investors to fund such a pool. But he agrees with Geithner that this has never been tried before. "As to how it will work, in fact, it remains to be seen,'' Hurley said. "There really isn't a good model for it.''

Geithner said today all he was seeking to do was outline the broad architecture of the new plan. It's still going to be a couple of more weeks before we know all the details of how those public-private investment pools are really supposed to work, and also what kind of mortgage foreclosure relief will be provided and how. On the foreclosure issue, Geithner took some criticism from Massachusetts Congressman Barney Frank, who chairs the Financial Services Committee and is a staunch Obama administration ally. Frank said $50 billion for foreclosure relief isn't enough, two weeks is too long to wait for details, and until then, Frank thinks there ought to be a moratorium nationwide on foreclosures until bankers and borrowers know what the new plan will be.