The Obama administration yesterday launched its much-awaited assault on the worst United States banking crisis in 70 years, preparing an infusion of billions of federal dollars to thaw the nation's frozen credit markets and ease the economy out of recession.

Treasury Secretary Timothy Geithner's banking plan will use low-interest loans and between US$75 billion to US$100 billion of what's left of the government's US$700 billion bailout fund to entice private-sector investors to initially buy about US$500 billion in toxic assets - taking them off the books of the nation's banks.

Figure could grow

The administration also said the initial effort could grow to US$1 trillion, as the programme proves successful in attacking the problem that has stifled bank lending to consumers and businesses, com-pounding the worsening global downturn.

The announcement of the plan sent world stock markets soaring yesterday.

On Wall Street, major stock indexes jumped almost six per cent. Half an hour to the closing bell, the Dow Jones industrial average was up by 410 points.

President Barack Obama told reporters yesterday his economic team was "very confident" the rescue plan would work and that taxpayers would share both in the upside of the plan, as well as the burden of any losses.

Moving in right direction

"The good news is that we have one more critical element in our recovery," said Obama, surrounded in the Cabinet room by leaders of his economic team. "But we've still got a long way to go."

He also downplayed expecta-tions for a quick fix.

"It's not going to happen overnight. But we think that we are moving in the right direction," the president said.

Glimmers of hope

At the same time, Obama said the economy was beginning to show "glimmers of hope" in the housing market, where the bursting real-estate price bubble last year set in motion the financial crisis that nearly brought the system to collapse.

The programme may face stiff resistance as it debuts after a week of Wall Street-bashing in Congress, where lawmakers were outraged over troubled insurance company American International Group Inc paying US$165 million in bonuses after taking more than US$170 billion in government bailouts to stay afloat.

Obama, who expressed outrage over the payouts, has, nevertheless, signalled opposition to a quickly passed House of Representatives measure to tax such bonuses at 90 per cent.

In a CBS television interview broadcast Sunday he questioned the bill on constitutional grounds.

The programme was not the first such attempt by the new administration to revitalize an economy mired in recession.

Geithner counseled patience, saying work to rehabilitate the banking and financial industry has to go forward despite "deep anger and outrage" over bad lending and investment practices

In a lengthy fact sheet on the bank rescue plan released Monday, the administration said it expects participation from a broad array of private sources, ranging from pension funds to insurance companies and other long-term investors.

The Federal Reserve, which is the US central bank, and the Federal Deposit Insurance Corp, an independent agency of the government that backs bank deposits, will have large roles in putting up the needed cash.

Under a typical transaction, for every US$100 in soured mortgages being purchased from banks, the private sector would put up US$7 and that would be matched by US$7 from the government.

The remaining US$86 would be covered by a government loan provided in many cases by the Federal Deposit Insurance Corp.

Geithner defended the decision to have the government carry so much of the risk.

He said the alternative would have been to do nothing and risk a more prolonged recession or have the government carry all of the risk.

Geithner also said there would be significant advantages from having private market participants bidding against each other to set prices for which the bad assets will be purchased.

"There is no doubt the government is taking risks," he told reporters. "You can't solve a financial crisis without the government taking risks."

Geithner, meanwhile, wrote in Monday's Wall Street Journal that the new bank programme aimed to "resolve the crisis as quickly and effectively as possible at the least cost to the taxpayer. ... Simply hoping for banks to work these assets off over time risks prolonging the crisis."

The government has been struggling since the credit crisis hit last fall to find a way to sop up the bad assets.

The Geithner banking plan was designed to resolve the vexing problems of how to price the bad bank assets while showing the government has sufficient capital to make a difference.

The administration hopes the market reaction to this proposal proves more favorable than Geithner's initial broad outline for the overhaul on Feb. 10, when investors, upset with a lack of detail, sent the Dow Jones industrial average tumbling that day.

To encourage investors to be more supportive, the government is offering sizable financial enticements, from shouldering much of the financial risk to providing low-interest loans to purchase the assets.

Some hedge funds and other investors have expressed reluctance to participate in the new program for fear that Congress will subject them to what they view as onerous restrictions on executive compensation.

Administration officials, however, insisted that they believe they have found the right mix to attract private investors and make a dent in what, by some estimates, could be more than US$2 trillion in troubled assets on banks' books.

AP