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01 October 2023

Obama vows banking clean-up in new bailout

President Barack Obama answers questions from Indiana residents during a town halll style meeting at Concord High School in Elkhart, Indiana. (GETTY IMAGES)

President Barack Obama vowed late Monday to work with distressed US banks to "clean up" their balance sheets and unclog blocked credit lines, as his Treasury team readied a new bailout plan.

Obama previewed Treasury Secretary Timothy Geithner's announcement Tuesday of how the administration intends to spend the remaining $350 billion of a fiercely controversial rescue program for the banking industry.

"We are going to have to work with the banks in an effective way to clean up their balance sheets so that some trust is restored within the marketplace, because right now part of the problem is that nobody really knows what's on the banks' books," the president told his first White House news conference.

"Tim Geithner will be announcing some very clear and specific plans for how we are going to start loosening up credit once again," he said, pledging greater transparency and a directive for banks to rein in executive bonuses.

The plan will also include help for homeowners facing foreclosure or suffering from the nationwide slump in property values, Obama noted, after administration officials said $50 billion would go to housing.

"One of my bottom lines is whether or not credit is flowing to the people who need it," the president said. "The package we've put together is designed to help do that.

"We've got to open things up and restore some trust. We also have to deal with the housing issue in a clear and consistent way."

The Obama administration delayed its scheduled unveiling of Geithner's Financial Stability and Recovery Plan by a day to focus on pushing a stimulus package worth more than 800 billion dollars through Congress.

According to US media reports, Geithner's plan will include a government partnership with the private sector to buy banks' troubled assets, creating a so-called aggregator bank.

The aggregator bank, commonly known as a "bad bank" because of the toxic assets it would acquire, would be designed to allow banks to dispose of soured assets without worsening their weakened condition.

The toxic assets include failing mortgages and other bad investment bets that are weighing on banks and are difficult to value, keeping credit flows seized up and depressing the wider economy.

The Wall Street Journal said the "bad bank" would be seeded with funds from the $700-billion Troubled Asset Relief Program (TARP), "but the idea is that most financing would come from the private sector."

Obama said government intervention was crucial to stabilizing the banking sector, and stressed: "We've got to restore confidence so that private capital goes back in."

Administration officials said Geithner's plan also includes fresh cash injections into banks, a major expansion of a Federal Reserve program aimed at kick-starting consumer lending, and new support for struggling homeowners.

The first half of the TARP, created in October to shore up faltering banks and unfreeze credit as the global financial crisis accelerated, was spent by George W. Bush's administration but did little towards its intended goals.

"Because of a lack of clarity and consistency in how it was applied, a lack of oversight in how the money went out, we didn't get as big of a bang for the buck as we should have," Obama said.

"My immediate task is making sure that the second half of that money, $350 billion, is spent properly."

However, Obama refused to be drawn on whether his administration would have to return to Congress for more TARP money, with many economists estimating that US banks will need at least one trillion dollars to shed their bad assets.

Morgan Keenan analyst Kevin Giddis said the "aggregator bank" was key to the success of Obama's broader efforts to haul the US economy out of its worst crisis since the 1930s Great Depression.

"This part of the plan is the one that could restore some confidence in the system, and bring the customer back into the fold," Giddis said.

"If you then use the stimulus plan to 'throw some cash into the air,' it just might be enough to jar the economy loose and begin the recovery," he said.