WASHINGTON — The Treasury Department is expected to unveil early next week its long-delayed plan to buy as much as $1 trillion in troubled mortgages and related assets from financial institutions, people close to the talks told the New York Times.
The plan is likely to offer generous taxpayer subsidies, in the form of low-interest loans, to coax private investors to form partnerships with the government to buy toxic assets from banks. To help protect taxpayers, who would pay for the bulk of the purchases, the plan calls for auctioning assets to the highest bidders.
The uproar over AIG's bonuses has not stopped the Obama administration from plowing ahead. The plan is not expected to impose restrictions on the executive pay of private investors or fund managers who participate.
Known as the "Public-Private Investment Partnership," the Treasury plan is perhaps the most central component of President Barack Obama's program to rescue the nation's banks from a mountain of money-losing assets that are weighing down their balance sheets, crippling their ability to make new loans and deepening the economic recession.
Industry analysts estimate that the nation's banks are holding at least $2 trillion in troubled assets, mostly residential and commercial mortgages made at the height of the housing bubble.
The plan involves two separate approaches. In one, the Federal Deposit Insurance Corp. would set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.
In the second, the Treasury would hire four or five investment-management firms, matching the capital that each of the private firms puts up on a dollar-for-dollar basis with government money.
The goal of the plan is to leverage the dwindling resources of the Treasury's bailout program with money from private investors to buy up as many of those toxic assets as possible and free the banks to resume more normal lending.
Although the details of the FDIC part were still being finalized, it is expected the government would provide the overwhelming bulk of the money — possibly more than 95 percent — through loans or direct investments of taxpayer money.
The hope is that such a generous taxpayer subsidy will attract private investors into the market and accelerate the recovery of America's banks.