US toxic assets plan biggest test for Obama

The Obama administration faces its biggest test today when US Treasury secretary Tim Geithner unveils a plan to take hundreds of billions of dollars of toxic assets off banks' balance sheets.

The Treasury plan, on which the credibility of the administration hinges, will subsidise private investors to buy up such assets through a Public Private Investment Programme it hopes will unfreeze credit markets.

“We can't let our anger over mistakes that happened last year block the fact that we've got to save the economy; we have to fix this problem,” Austan Goolsbee, one of President Barack Obama's top economic advisers, told CBS yesterday, referring to public and congressional outrage about $165m in bonuses paid to executives at insurer AIG.

Another administration official told the FT: “This is not the silver bullet. It is part of our larger programme to increase lending and support economic recovery. Taking troubled assets off bank balance sheets is the next step in the process.”

Other elements in the administration's approach include tests next month to determine banks' recapitalisation needs and principles Mr Geithner is expected to set out this week to cut down on systemic risk to the financial sector. His approach would open the door to regulation of hedge funds and include greater transparency and internal company oversight to align financial executives' pay with institutions' long-term health rather than with short-term performance.

The White House said that the administration's regulatory efforts included “establishing new resolution authority to deal with companies that pose risks to our broader financial system”.

Private money to buy toxic assets is expected to be a small fraction of government resources made available for the purpose.

Christina Romer, chairman of Mr Obama's council of economic advisers, said Treasury funds to buy toxic assets would be bulked up by resources from the Federal Reserve and the Federal Deposit Insurance Corporation. She stressed the role of private financial institutions in helping price toxic assets and preventing taxpayers from paying too much.