WASHINGTON — Treasury Secretary Timothy Geithner said Tuesday the new administration will wage an aggressive two-front battle against the worst financial crisis in seven decades, while the Federal Reserve is expanding a key lending program to up to $1 trillion.
The news landed with a thud on Wall Street.
Worried that the revamped financial bailout was far too short on details, investors drove the Dow Jones industrials tumbling more than 380 points.
The plan could send as much as $2 trillion through the banking system and the broader economy, and Geithner stressed the government would act to stop "catastrophic failure" of financial institutions.
He said the loss of 3 million jobs last year, and another 600,000 just last month underscored the urgency for government action.
"It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," Geithner said. "We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families."
But investors fretted that the government was nowhere near untangling the crisis that has paralyzed the financial system and hammered the economy. Wall Street suffered its worst day since Dec. 1.
"The good news is they are going to spend a trillion dollars," said James Cox, managing partner at Harris Financial Group. "The bad news is they don't know how."
The administration called it the Financial Stability Plan, abandoning the old TARP, or Troubled Asset Relief Program. And while it may have a new name, investors were also quick to point out new problems.
Wall Street seemed concerned it does not solve the problem of how to get the soured mortgage-backed assets off banks' books — the heart of the crisis.
Asked about the negative investor response, President Obama told ABC News that Wall Street "is hoping for an easy out on this thing, and there is no easy out."
For now, the Obama administration says it does not need more than the second $350 billion chunk of the bailout fund, but it concedes that may change.
"We are going to have to adapt our program as conditions change. We will have to try things we never tried before," Geithner said. "We will make mistakes. We will go throughout periods in which things get worse and progress is uneven or interrupted."
The new approach aims to use both public and private cash to buy soured assets from banks. But the plan provides almost no detail on how the assets would be priced — only that it would be left to the private sector. Pricing the bad assets is key, in part because pricing them too low would force banks to take devastating writedowns.
The government will also use some of the bailout cash to try to kick-start as much as $1 trillion in lending — hoping that getting the private market for bundled loans humming again will unlock credit.
Geithner also wants to put all banks with more than $100 billion in assets through a "stress test" to determine whether they can handle the losses that could come from an extended economic downturn.
But details on that part of the plan were sketchy, too. It also raises legal questions about what would happen to banks that refuse to participate.
"Let's say they do a stress test and conclude that a bank is insolvent. The bank could say, 'No, that's not the case and we're going to challenge you,' " banking analyst Bert Ely said. "There's a potential for a lot of litigation."
Banking industry officials reacted with caution.
"There are a lot of details that have not been provided yet, and the devil is in the details," said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.
Critics of how the Bush administration handled the first half of the bailout say it doled out money to banks with few strings attached and failed to get banks to resume more normal lending.
It will be at least a week before the Obama administration provides details of how it plans to help homeowners. Geithner did say the government will use $50 billion of bailout money for that and suggested it would help reduce mortgage principal and lower mortgage rates.
Even so, "There's not a hell of a lot here to get a sense of," Sen. Robert Menendez, D-N.J., told Geithner in an appearance later Tuesday before the Senate Banking Committee.
Geithner said the administration was laying out the "broad architecture" for the program with more details to come. He stressed the urgency of moving boldly, given the troubles.
Geithner stressed the $1 trillion figures represented loans that would ultimately be repaid. And he said the cost of doing nothing would be far higher.
"The complete collapse of our financial system would be incalculable for families, for businesses and for our nation," he said.