WASHINGTON: The Obama administration unveiled a much-anticipated plan to rescue the American banking system at a cost that could hit $2 trillion, revealing the frightening depth of the economic crisis facing the United States and sparking a major sell-off on Wall Street.
That unprecedented figure, which would include a mixture of government and private sector money designed to rid bank balance sheets of toxic investments and thaw frozen credit markets, is coupled with the separate likely addition by Congress of $800-plus billion to stimulate the downward spiraling economy.
President Barack Obama has staked his presidency on rescuing the economy and the plans could mark a federal intrusion into the U.S. market economy not seen since the 1930s Great Depression.
In a display of urgency, White House chief of staff Rahm Emanuel traveled to the Capitol for meetings that stretched into the night with Democratic leaders as well as moderate senators whose views — and votes — will be key to any deal. Democratic leaders have long pledged to have stimulus legislation on Obama's desk by mid-month.
Negotiators hoped to seal agreement on the economic stimulus package Wednesday after making good progress in the first rounds of closed-door talks.
Obama's negotiating team insisted on restoring some lost funding for school construction projects as talks began Tuesday in hopes of striking a quick agreement, but by late in the day it appeared resigned to losing up to $40 billion in aid to state governments.
Earlier Tuesday, the Senate sailed to approval of its $838 billion economic stimulus bill, but with only three moderate Republicans signing on and then demanding the bill's cost go down when the final version emerges from negotiations.
Negotiators were working with a target of about $800 billion for the final bill, lawmakers said.
A lack of detail about the bailout program announced by Treasury Secretary Timothy Geithner and questions about whether the private sector could be enticed to sign on sent stocks tumbling 382 points, losing more than 4.5 percent of their value. Banking and financial stocks were particularly hard hit.
Obama said Wall Street was mistakenly looking for an "easy out" in the bailout plan, telling ABC television it was time for banks and the financial sector to come clean about the scope of their loses.
Geithner explained his complex banking rescue plan shortly before the Senate voted to give the administration $838 billion in spending and tax cuts to put the brakes on the economic slide. The Senate measure still must be reconciled with a slightly smaller measure passed by the House of Representatives late last month. Obama wants that done quickly so he can have a bill to sign into law by early next week.
Part of the Senate package retained language that would restrict spending to U.S.-produced iron and steel for stimulus projects.
Geithner revealed the massive financial rescue effort only moments before Obama told an audience in Fort Myers, Florida, that "the situation we face could not be more serious." The city is among the hardest-hit in the storm of home mortgage foreclosures sweeping the nation.
The president, moving into his fourth crisis-laden week in office, had used his first White House news conference Monday night to warn Congress that it risked turning "a crisis into a catastrophe" had it failed to approve a the stimulus package.
While the plan made it through both houses of the legislature, it drew only three Republican votes in the Senate and none in the House, a major slap at Obama's vows to take the partisan heat out of the U.S. political process.
Geithner sternly warned the nation that it was facing a rough year and said the only way to turn around the economy was to use unprecedented amounts of government funds.
"This strategy will cost money, it will involve risk and it will take time," Geithner said in announcing the plan.
He said it would attack the financial collapse on three fronts: Working to restart the flow of credit, removing bad debt from the books of troubled banks and providing assistance for ordinary Americans and small businesses.
The bailout plan grew out of a $700 billion rescue program put in place in October, under the Bush administration, as the depth of the country's financial sector troubles surfaced with a collapse of the housing market.
"Right now critical parts of our financial system are damaged," Geithner said in unveiling the new plan. "Instead of catalyzing recovery, the financial system is working against recovery and that's the dangerous dynamic we need to change."
In moving on the three tracks, Geithner said the administration intended to:
_Ensure that banks' balance sheets are "cleaner and stronger."
_Establish a fund that combines the resources of the U.S. Federal Reserve, the Federal Deposit Insurance corporation and the private sector that could reach $1 trillion to stimulate spending, particularly in real estate that is "the heart of this crisis." He said the initial target total for the fund was $500 billion.
_Set aside $100 billion from the bailout fund to support an additional $1 trillion in lending under a Federal Reserve program that was announced in November but has yet to begin operations.
Half of the $700 billion bailout money was allocated by former President George W. Bush's administration, but that spending has come under heavy criticism for a lack of transparency and the failure of banks to put the money into the frozen credit market.
Obama defended the massive government spending during his press conference Monday night, saying the federal government "is the only entity left with the resources to jolt our economy back to life."
http://www.iht.com/articles/ap/2009/02/11/america/NA-US-Obama.php
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