The Obama Administration aims to roll out a menu of options this week to help stabilise the US banking industry, with government aid tailored to individual banks' needs, a source familiar with the Administration's thinking said.
The source, who spoke anonymously because the plan is still being finalised, said the options are likely to include a "bad bank" that could soak up mortgage securities and other distressed investments weighing down banks' balance sheets and holding back new lending.
The plan would also include government insurance on a select portfolio of banks' troubled assets to help shield banks from future losses.
A third component would be capital injections by the government in exchange for common shares, rather than the preferred shares and warrants taken so far under the Treasury Department's $700 billion Troubled Asset Relief Programmw (TARP).
Issuing new shares of common stock to the government would help banks protect their balance sheets, as banks are forced to subtract losses from their common equity.
The White House declined to comment.
The Administration hopes to unveil the plan as early as tomorrow or Wednesday, according to the source.
"They're hoping to lay out a menu of options that would provide flexibility and creativity," the source said. The plan would not be a one-size-fits-all approach but would attempt to tailor assistance based on an individual bank's needs.
CNBC reported there were round-the-clock meetings between government officials and senior bank executives over the "bad bank" idea but the talks had hit a snag because consensus could not be reached over how it would work.
The government faces a tough task in trying balance the interests of bankers and taxpayers in setting up a bad bank to soak up the bad assets.
If the government values the assets too high, the taxpayer would be unduly burdened. If they are priced too low, an accounting tsunami would be set off as other banks are forced to write down assets on their own books.
The total cost of the new bank rescue programme remained unclear, according to the source.
Sen. Charles Schumer, a New York Democrat, last week said that some experts think creating a "bad bank" to buy toxic assets could require as much as $4 trillion.
For weeks, top US policymakers have been discussing the idea of a "bad bank" to help stabilise the struggling US banking industry.