The Obama administration's eagerly-awaited bank rescue plan will offer to insure some distressed assets held by banks, authorise the government to purchase others, and spend up to $100 billion (Dh367bn) to buy and modify troubled homeowner mortgages, a source with knowledge of the plan said.
The so-called Troubled Asset Relief Programme (Tarp) was created in October to help steady the United States financial system, which has been rocked by a plunge in housing prices, steep bank write-downs and an unraveling economy.
Much of the first $350bn in Tarp was used by the Bush administration to inject capital into banks and Detroit car makers in exchange for preferred shares and warrants. The focus of the next phase of Tarp spending has been hotly debated within the Obama administration and by lawmakers.
"One size does not fit all," the source said. "The goal here is to speed the resources so that they do the most good for the economy."
The largest portion of the remaining money will be earmarked to offer federal insurance to banks so they can clearly separate, or "ring fence", bad assets that have lost much of their value in recent months, the source said.
The programme will be similar to insurance already offered to Citigroup and Bank of America, the source said. Tarp is providing insurance on $301bn of Citi's troubled assets and $118bn at Bank of America, subject to certain deductibles.
About $50bn to $100bn of remaining Tarp money will be used to buy distressed mortgages from banks and modify their terms to help homeowners prevent foreclosure, as the administration had promised, the source said.
The remaining Tarp money will be used to expand a Federal Reserve lending programme which can act as a kind of "bad bank" to mop up toxic assets, the source said. The Treasury had already pledged $20bn from the first half of the Tarp spending for the programme, the Term Asset-Backed Loan Facility (Talf).
Under the current Talf programme, the Fed vowed to pump up to $200bn into credit markets with loans that are collateralised by automobile, student, credit card and small business loans, to free up credit. Any losses would be covered by the Tarp funding.
More Tarp funds would allow the Fed to expand the programme to cover a wider range of assets.
CNBC reported that the "bad bank" would buy up to $500bn in troubled assets. However, a source told Reuters that Treasury will buy the assets at a discount, not at the assets' "carrying value" that the banks have on their balance sheets.
"It has been scaled back considerably," the source said, referring to the bad bank concept. The change came after two influential Democrats, Senator Charles Schumer of New York and US House Speaker Nancy Pelosi, said taxpayer funds should focus on insurance guarantees rather than a bad bank approach.
A government watchdog, special inspector general Neil Barofsky, said on Thursday that the government should be cautious in expanding Talf to mortgage-backed securities that have sunk in value on banks' balance sheets. Anti-fraud measures are crucial before expanding the programme, he said in a report to Congress.
The Obama administration's bank rescue blueprint also reflects plans by Barney Frank, chairman of the House Financial Services Committee, to seek legislation that would let the Federal Deposit Insurance Corp more than triple its credit line to $100bn.
Such an increase would give the bank regulator more financial power to handle US bank failures. The FDIC's deposit insurance fund shrank to $34.6bn in the 2008 third quarter because of a surge in bank failures.
The administration's plan remained fluid.