Feb 10 (Reuters) - U.S. Treasury Secretary Timothy Geithner on Tuesday will announce a plan to take $500 billion in bad assets off the books of struggling banks and expand a Federal Reserve program to support up to $1 trillion in asset-backed securities, according to sources.
Geithner is scheduled unveil the plan at 11 a.m. (1600 GMT). Following is a look at the plan -- the Obama administration's approach to tapping the second half of the government's $700 billion financial bailout fund -- as described by sources.
FUNDING FED PROGRAM
The Treasury will use some of the remaining bailout funds to help the Fed expand a program that had been set up to support consumer and small business lending.
Under the program -- the Term Asset-Backed Securities Loan Facility -- the Fed had planned to lend up to $200 billion to holders of AAA-rated asset-backed securities collateralized by auto, student, credit card and small business loans, to try to free up credit. The Treasury pledged $20 billion to cover potential losses the Fed might face.
Sources said the program would be expanded to $1 trillion so the Fed could use it to support commercial and private-label mortgage-backed securities.
The sources did not make clear how much the Treasury would need to use from the $700 billion bailout fund to cover the credit risks the Fed would be taking.
PUBLIC-PRIVATE PARTNERSHIP ON BAD ASSETS
Sources said Geithner would outline a public-private partnership that would aim to take $500 billion in distressed assets off bank books, with some sources saying the figure could be raised to $1 trillion. This would be akin to setting up a "bad bank" to clean up balance sheets.
"It can't all be private capital," Lawrence Summers, the head of the White House National Economic Council, told Fox News television on Sunday. "But with the right kinds of government guarantees, with the right kinds of financing ... with the right strategic approaches, Secretary Geithner believes that we can bring in substantial private capital."
Details on how the government would lure private investors to buy distressed assets were sketchy. Sources said private investors would be able to buy assets through low-cost funding from the Fed, perhaps obtained through the expanded TALF, or by using a Federal Deposit Insurance Corp guarantee program.
MORTGAGE FORECLOSURE RELIEF
The White House had already promised to dedicate between $50 billion and $100 billion of remaining bailout funds to prevent foreclosures. An aide to the U.S. House of Representatives Financial Services Committee said $50 billion would be set aside for this purpose.
Sources said officials are considering a plan to have government-controlled mortgage enterprises Fannie Mae and Freddie Mac underwrite failing loans. The government would then give other mortgage companies a subsidy to follow the lead of Fannie Mae and Freddie Mac, according to the sources.
The evolving plan would be similar to a proposal that Democrats in Congress had favored to fund a mortgage guarantee program hatched by the FDIC under which the government would insure loans against default.
Summers said on Monday that President Barack Obama would lay out his approach to the housing crisis within two weeks.
CAPITAL INJECTIONS
Sources said the Treasury would continued tapping bailout funds to make investment in banks, but that the banks would first need to undergo a government review.
Banks deal with different regulators, but sources said those regulators will agree on common standards for rigorous stress-testing so that markets can have confidence they are safe and sound.
Under the investment program, the government has been taking preferred shares and warrants for future common shares at deep discounts.
However, a source said the government would likely begin taking preferred stakes that would eventually convert into common equity. The would buy time for a bank to recover before shareholders are diluted, but the government could eventually end up with large stakes in weak banks.
Banks receiving aid were also expected to have to detail how they were using the funds to increase lending and are likely to face toughened requirements restricting dividends and compensation. The administration was also expected to press them to take steps to reduce mortgage foreclosures. (Compiled by Reuters' Washington financial reporting team; Editing by Ruth Pitchford)