Treasury Plans More Expansive Approach to Financial Rescue

--no bad bank to buy toxic asstes, as was once envisoned. --more capital injection with stringent terms; preferred stocks that can be convertible to common stocks --broaden the scope of collaterals for Term ABS Loan Facility --FDIC continues to garantee debt iussances --FDIC has the authority to dismantale non depository financial institutions --Allows judges or GSE mortgages firms to modify terms By DEBORAH SOLOMON and DAMIAN PALETTA WASHINGTON -- Treasury Secretary Timothy Geithner's revamp of the $700 billion financial-sector bailout is likely to rely on a broad range of tools, from injecting additional capital into banks and helping homeowners avoid foreclosure to expanding the roles of the Federal Reserve, Fannie Mae, Freddie Mac and the Federal Deposit Insurance Corp., according to people familiar with the matter. The final plan isn't likely to include the creation of a government bank to directly buy bad assets from banks, as was once envisioned. That plan foundered because of its cost and complexity. Instead, the goal will likely be to expand a Fed program to reboot credit markets, among other ways to relieve banks of their bad bets. The bailout plan has evolved in recent weeks as policy makers debated the merits of various approaches. The Obama administration has taken longer than some expected to finalize a plan as it sought to craft what it has called a "comprehensive" approach to replace the ad hoc initiatives of the previous administration. View Full Image Getty Images Treasury Secretary Timothy Geithner Mr. Geithner is scheduled to give a speech midday Monday on the bailout overhaul. It isn't known if he will announce all the elements at the same time. Government officials are expected to continue working on the plan through the weekend, and its composition could change. The Treasury secretary is expected to sell the program as a framework to address the financial crisis by attacking its root causes: defaulting loans and rotten assets clogging the books of financial institutions. The government has already committed $350 billion of the $700 billion financial-sector bailout fund approved by Congress last fall. Many economists -- and some lawmakers -- expect the administration to eventually ask Congress for more money. Geithner Relays Economic WoesTo improve the bailout's poor public image, the administration is considering renaming the $700 billion Troubled Asset Relief Program and making it independent of the Treasury. It is also going to announce new terms and conditions for companies that receive or have already taken government aid -- in addition to the new executive-compensation limits announced this week -- including a demand that they report how the money is being spent. The rescue is shaping up to include a second round of capital injections with tougher terms. The government is looking to get money into banks by buying preferred shares that convert into common equity within seven years; that avoids diluting current shareholders' stakes while helping banks better withstand losses. The Treasury may also allow banks that already received capital injections to convert the Treasury's preferred shares to common stock over time. The Treasury is considering expanding the Fed's Term Asset-Backed Securities Loan Facility to include assets beyond the student, credit-card and auto loans it was set up to absorb. The program was set up to spur the consumer-loan market by providing financing for investors to purchase securities backed by consumer loans. Another idea being considered is government insurance to limit banks' losses on certain assets. The Obama administration is considering giving the FDIC the power to help dismantle large, troubled financial firms beyond the depository institutions over which it currently has authority. Such a move could require legislation. Top government officials, including Mr. Geithner, his predecessor Henry Paulson and Federal Reserve Chairman Ben Bernanke have said there needs to be a government entity empowered to wind down failed financial institutions that aren't banks. Regulators pointed to problems that occurred when Lehman Brothers Holdings Inc. and American International Group Inc. ran into trouble, in part because no federal body had the authority to step in and steer the firms toward an orderly demise. The FDIC could also guarantee a wider range of debt that banks issue to fund loans, according to people familiar with the matter. The guarantees could help free up credit to companies and consumers. Currently, the FDIC temporarily backs certain debt with a three-year maturity. Government fficials could move to guarantee debt with maturities up to 10 years. For homeowners, the administration is expected to announce a plan that could include the creation of national standards for loan modifications to be adopted by mortgage giants Fannie Mae and Freddie Mac. The plan could include a mechanism to determine the value of homes facing foreclosure -- something that has proven hard to do -- which could speed negotiations with troubled borrowers. A related move would see the government using taxpayer dollars to give mortgage companies an incentive to modify loans. One idea would help reduce interest rates by having the government match mortgage companies' interest-rate reductions to a certain amount. Mr. Geithner is also expected to express support for legislation that would allow judges to modify the terms of mortgages in bankruptcy court. With the financial crisis unabated, expectations are high for what Mr. Geithner will say. His speech will be a crucial test for the former Federal Reserve Bank of New York president, who is seeking to avoid the route taken by Mr. Paulson. The prior Treasury secretary's stuttering approach to the financial rescue helped taint its reputation. "People have the expectation that something fairly bold and creative is going to be presented," said Brian Bethune, chief financial economist with Global Insight. Indeed, stock markets rallied in part this week on the belief that Washington, buoyed by worsening economic news, will find some way to fix the financial ills. Write to Deborah Solomon at deborah.solomon@wsj.com and Damian Paletta at damian.paletta@wsj.com