Dr. Geithner’s prescription for the patient:  Banks to Get Stress Test Before Aid

WASHINGTON — Many U.S. banks will be subjected to rigorous examinations to see if they are healthy enough to lend before receiving additional financial aid, according to people familiar with the matter.

The stress tests will be part of the bailout revamp to be announced Tuesday by Treasury Secretary Timothy Geithner. In addition to fresh capital injections into banks, the new approach will include programs to help struggling homeowners; a significant expansion of a Federal Reserve program designed to jump-start consumer lending; and a private-public partnership to relieve banks of bad assets.

Follow the money:

The expanded effort could see as much as $2 trillion in financing flowing through the system, according to Congressional officials briefed Monday night. The expanded Fed facility and the “bad bank” could each reach $1 trillion in size, both of which would be seeded with bailout funds.

The administration is discussing spending between $100 billion and $200 billion investing new funds in banks, up to $100 billion to expand the Federal Reserve facility and $50 billion to help homeowners. The Treasury wants to keep some money available in case of emergencies. These commitments could eat up much of the second half of the $700 billion bailout fund.

What else has the doctor ordered?

Mr. Geithner will also unveil a host of new conditions for banks that receive government aid, including requiring that firms show how the money is being spent and how funds are helping to generate new lending. Banks must show how many new loans they provided with the assistance and how many assets they purchased. They must also agree to implement foreclosure mitigation programs, curb executive pay and not use the funds to purchase healthy banks until the government money is repaid.

The administration is still finalizing details of its a housing plan — which centers on financial incentives for mortgage companies to modify bad loans — and may not get into specifics Tuesday. It is expected to express support for a legislative proposal that would allow judges to alter the terms of troubled mortgages in bankruptcy court, but only if borrowers tried to have their loans modified.

Rinse, and repeat:  This is not nationalization.  This is temporary.  The taxpayers will be paid back.  This is not Fannie Mae and Freddie Mac.  It’s for our children’s children.  Feel better?

H/T Daily Beast

Update:

The market says thanks, Dr. G:  Stocks Tumble as Bailout Plan Is Unveiled

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