New Bank Rescue Plan Aimed at Easing Credit

The Federal Reserve also said it will expand a key lending program to as much as $1 trillion from $200 billion to boost resources for consumer credit and small business loans, reported the Associated Press.

The Fed has been working to launch the program since November and it will depend on the interest of private investors.

Despite the news, the Dow Jones industrial average plunged about 300 points in afternoon trading, reflecting Wall Street’s concerns about the government’s ability to revive the banking industry.

The administration also announced a program to create a government-private sector partnership to get private investors to buy bad assets that are currently weighing down banks’ balance sheets.

Geithner said the program will initially target the purchase of $500 billion in bad assets but could ultimately support up to $1 trillion in purchases, according to the AP. That brings the total commitments of the new bailout strategy to as much as to $2 trillion.

The government will also continue to offer direct capital injections into banks, which would come out of the remaining $350 billion in the Treasury’s rescue program, the New York Times reported.

“Right now critical parts of our financial system are damaged,” the Treasury secretary said. “Instead of catalyzing recovery, the financial system is working against recovery and that’s the dangerous dynamic we need to change.”

Geithner said economic recovery must be approached on two fronts: by jump-starting job creation and private investment and by getting credit flowing again to businesses and families.

Geithner later said more details on the new rescue framework are yet to come. The Treasury chief told CNBC on Tuesday that the Obama administration wants “to be careful to get this right.”

Following criticism that banks were receiving billions of dollars in taxpayer support with few restrictions under the initial $700 billion financial rescue plan, the administration plans to more closely monitor banks to make sure the money they get is going toward increasing lending.

Congress passed the first financial rescue bill in October and $350 billion in the program was committed by the Bush administration under former Treasury Secretary Henry Paulson.

President Barack Obama, speaking Monday night at a nationally televised press conference, said his overhaul of the financial rescue program would bring “transparency and oversight” to the criticized program.

He said the overhaul would correct previous mistakes such as a “lack of consistency” and what he called the failure of banks to show “some restraint” in terms of executive compensation and other perks.