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[link to www.telegraph.co.uk]

Tim Geithner's US bank rescue may not go far enough, experts warn
US President Barack Obama is poised within days to unveil a new trillion-dollar plan aimed at restoring America's crippled banking system to health, as anger over bonuses paid to executives at bailed-out institutions escalates.

By Richard Blackden and Edmund Conway
Last Updated: 9:48PM GMT 21 Mar 2009

Barack Obama is under pressure to rid America's lenders of toxic assets

However, even before it is officially launched, experts have warned that Treasury Secretary Tim Geithner's expected plan falls far short of what is needed to ease the financial crisis, with one Nobel prize-winning economist calling it an "awful mess".

The plan builds on the outline Mr Geithner provided last month, which was roundly slammed for lacking vital detail.

With US unemployment climbing towards 10pc, the Obama administration is under intense pressure to deliver proposals that rid America's lenders of the toxic assets that have choked off the supply of credit to the economy and that will also begin to restore private investors' confidence in the banking system.

Mr Geithner's new plan aims both to expand existing initiatives and to create new schemes alongside them. It plans first to dispose of toxic assets both by setting up a new entity to buy and hold the distressed loans that have eroded the capacity of banks to lend, and by creating a separate Public-Private Investment Fund, first outlined last month, to help fund private investors' purchases of some of the most illiquid mortgage-backed securities.

Second, the Federal Reserve will raise the amount it can lend to investors through its Term Asset-Backed Securities Loan Facility to increase the credit available to cash-strapped consumers and small businesses.
In stark contrast to Prime Minister Gordon Brown's approach, the US administration is reluctant to take large stakes in Wall Street banks as the price for injecting desperately needed capital.

Leading US economist Paul Krugman said the scheme would potentially socialise losses and privatise any gains in the financial system, leaving taxpayers worse off. "This plan will produce big gains for banks that didn't actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalised," he said.

"And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won't be able to come back to Congress for a plan that might actually work. What an awful mess."

Other critics warn that Mr Geithner's hope to encourage private investors to take on the toxic assets is fraught with difficulties over how the securities, which have long since ceased to be traded, will be priced.

"The American authorities are reluctant to inject the taxpayers' funds needed to get them [the banks] on their feet," said Barry Eichengreen, an expert on America's financial system. "And no bank recapitalisation means no recovery."

The tightrope that President Obama and his Treasury Secretary will have to walk this week is being made that much more precarious by a growing reluctance in Congress to hand over more money to Wall Street. Sparked by the revelation that at least $165m in bonuses have been paid to executives of the bailed-out insurer American International Group, the Senate is due to vote this week on a plan to impose a 70pc tax on bonuses paid to banks that have received taxpayers' cash.