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Treasury Secretary Timothy Geithner holds a news conference at the Treasury Department in Washington, D.C. ((Lawrence Jackson/Associated Press))

The U.S. Treasury unveiled a new financial rescue plan on Tuesday designed to get rid of the $500 billion in spoiled assets on the books of U.S. banks and support $1 trillion in new lending through an expanded Federal Reserve program.

The renamed "Financial Stability Plan," rolled out by Treasury Secretary Timothy Geithner will also devote $50 billion in federal rescue funds to try to stem home foreclosures and soften the crushing impact of the housing crisis now afflicting the entire economy.

A public-private investment fund will be established and seeded with government money to leverage private capital so that so-called toxic assets can be sponged out of the faltering banking system. The goal is to enable banks to resume lending.

'The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis … added to public distrust.'—Timothy Geithner, U.S. Treasury Secretary 

"It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," Geithner said. "We have to both jump-start job creation and private investment, and we must get credit flowing again to businesses and families."

The public-private investment fund would start at $500 billion but could expand to up to $1 trillion.

Geithner acknowledged deep skepticism has developed over the fairness and efficiency of a $700-billion bank bailout program approved by Congress in October. He said leaders of some financial institutions that have received money had squandered the good faith that is needed to make the bank rescue effective.

"The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust," Geithner said. 

The new approach to the government's financial rescue war chest would use $100 billion to cover risks the Fed would take in expanding a $200 billion program supporting consumer and small-business lending to a $1 trillion program that also supports an array of mortgage-related assets.

Housing support

"We will also launch a comprehensive housing program," Geithner said. "Millions of Americans have lost their homes, and millions more live with the risk that they will be unable to meet their payments or refinance their mortgages. Many of these families borrowed beyond their means, but many others fell victim to terrible lending practices that left them exposed, overextended, and with no way to refinance."

The administration also announced that the program would be expanded beyond consumer and small-business loans to provide aid to the troubled commercial real estate sector.

After Geithner's announcement, stock prices and the dollar fell further while prices for U.S. Treasury debt securities extended gains.

"The causes of this crisis are many and complex. They accumulated over a long period of time, and they will take time to resolve," Geithner said.

"Governments and central banks around the world pursued policies that, with the benefit of hindsight, caused a huge global boom in credit, pushed housing prices and financial markets to levels that defied gravity."