The Obama administration on Monday unveiled details of a toxic asset rescue plan, taking a bold step to cleanse from bank balance sheets bad assets that have frozen up lending and fueled the recession.

The Treasury said the three-part program will provide financing through the Federal Reserve and the Federal Deposit Insurance Corp. (FDIC) to help public-private investment partnerships buy up to 1 trillion dollars in distressed loans and securities.

Three-part program

At the core of the financing package will be US$75 billion to US$100 billion in capital from the financial bailout package, which was known as the TARP, or the Troubled Assets Relief Program, along with the share provided by private investors.

"Using US$75 billion to US$100 billion in TARP capital and capital from private investors, the Public-Private Investment Program will generate US$500 billion in purchasing power to buy legacy assets with the potential to expand to US$1 trillion over time," said the Treasury in a statement.

"This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly," it said. "Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience."

According to the Treasury, the new long-awaited program will have three major parts:

-- A public-private partnership to back private investors' purchases of bad assets, with the Treasury support coming from the US$700-billion financial bailout fund. The government would match private investors, such as hedge funds, dollar for dollar and share any profits equally.

-- Expansion of a recently launched Federal Reserve program that provides under its new Term Asset-Backed Securities Loan Facility, or TALF. Under the new program, the TALF will also address the broken markets for securities tied to residential and commercial real estate and consumer credit.

-- Use of the FDIC, which insures bank deposits, to extend loans to support purchases of toxic assets. The FDIC would also share the risks if the mortgages fell further in value.

According to the Treasury, it works like this: if a bank has a pool of residential mortgages with 100-dollar face value that it is seeking to divest, the bank would approach the FDIC.

The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to- equity ratio. The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids.

Suppose the winning bidder offered US$84, the FDIC would provide guarantees for US$72 of financing, leaving US$12 of equity. The Treasury would then provide 50 percent of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately US$6, with the private investor contributing US$6.

"Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets," Treasury Secretary Timothy Geithner wrote on Monday's Wall Street Journal.