Feb. 10 (Bloomberg) -- President Barack Obama signaled he would be open to seeking an expansion of the $700 billion financial-rescue program should the plan fail to restore stability to the U.S. banking system.

“We don’t know yet whether we’re going to need additional money or how much additional money we’ll need until we’ve seen how successful we are at restoring a sense of confidence in the marketplace,” Obama said in a news conference last night in Washington.

Treasury Secretary Timothy Geithner today will announce an overhaul of the bank-bailout fund. The plan, which so far won’t seek additional government money, is designed to support about $1.5 trillion in new lending and handling of distressed assets. It has three main components: more capital for banks, financing for as much as $1 trillion of consumer and business loans, and public financing for investors willing to buy the distressed assets, people familiar with the matter said.

The president’s remarks indicate he acknowledges the assessment of many economists that the $350 billion remaining in the Treasury’s Troubled Asset Relief Program is insufficient to revive credit markets. The International Monetary Fund forecasts financial companies will need to write down over $1 trillion more of their U.S. mortgage debt.

‘Dangerous Dynamic’

“The financial system is working against recovery, and that’s the dangerous dynamic we need to change,” Geithner said in remarks prepared for delivery today. “Without credit, economies cannot grow, and right now, critical parts of our financial system are damaged.”

Geithner, whose announcement is scheduled for 11 a.m. in Washington, will also rename the $700 billion TARP fund, which will be known as the Financial Stability Plan. Among the plan’s other components is $50 billion for measures to stem mortgage foreclosures, Republican and a Democratic congressional aides said after Treasury officials briefed lawmakers and staff members yesterday.

“We are going to have to work with the banks in an effective way to clean up their balance sheets so that some trust is restored within the marketplace,” Obama said in his first prime-time news briefing. At “any given bank they’re not sure what kinds of losses are there. We’ve got to open things up and restore some trust.”

New Tests

Regulators plan to subject banks to new tests to determine whether they have enough capital, the people familiar with the matter said. The Treasury, Federal Reserve and other supervisors in the President’s Working Group on financial markets will develop guidelines for the examinations.

Banks that don’t have sufficient capital under various scenarios for losses on their assets will be able to get additional taxpayer funds in the form of convertible preferred securities, the people said.

The new capital injections would have tougher conditions than the Treasury’s first round of bank-stake purchases. Participating banks will be subject to lending requirements and restrictions on new acquisitions and dividends.

“The American people have lost faith in the leaders of our financial institutions” and are skeptical of the rescue spending so far, Geithner will say today.

The administration is also aiming to differentiate the next phase of the financial plan by bringing in private investors. It plans a public-private investment fund to take on older toxic assets. Officials haven’t yet decided on the specific mechanics of the facility, which will be introduced in lieu of the so- called bad bank of earlier proposals.

Risk, Time

“This comprehensive strategy will cost money, involve risk, and take time,” Geithner will say. The initial bailout effort, which he helped administer in his previous job as head of the Federal Reserve Bank of New York, was “essential” and also “inadequate” to support the financial system and the secondary lending market, according to Geithner.

The scope of the investment fund is expected to be as much as $500 billion, backed by roughly $50 billion in public funding, the people familiar said.

To kick-start new lending, the Financial Stability Plan will expand a Federal Reserve program for consumer and business loans to as much as $1 trillion from the current $200 billion. The Term Asset-Backed Securities Lending Facility will be backed by as much as $100 billion of Treasury funds in case of losses.

Fed officials have yet to start up the TALF, which was intended to be under way this month. It will lend funds to investors in securities backed by student, credit-card and auto loans. Eligible debt will be expanded to include commercial mortgage-backed securities, and more types of lending may be added later on, according to the people familiar with the plan.

FDIC Role Expanded

The Federal Deposit Insurance Corp. is also set to expand its debt-guarantee program, created late last year to ensure banks’ access to credit markets, the people said. The agency is looking at 10-year guarantees for some kinds of assets.

The new approach comes four months after the start of the $700 billion TARP, which both Democrats and Republicans have criticized as ineffective. Geithner faces the task of reviving a U.S. banking system throttled by $752 billion in credit losses and an economy that lost almost 600,000 jobs last month.

Economic news this week is expected to show a further deterioration. Sales at U.S. retailers probably fell in January for a seventh straight month, capping the longest slide since comparable records began in 1992. The Commerce Department report will probably show purchases declined 0.8 percent, according to the median estimate in a Bloomberg News survey.

With the economic downturn deepening, attracting private money to the financial industry may be difficult. The Standard and Poor’s 500 Banks Index has fallen 33 percent since the start of last month, and 65 percent in the past year.

‘Difficult Year’

Bank of America Corp. plunged 53 percent in the past month, closing at $6.89 last week even after the government agreed in January to backstop a portfolio of more than $100 billion of its assets. Citigroup Inc. which in November got a joint federal guarantee for investments in excess of $300 billion, closed at $3.95.

The Obama administration will seek to “catalyze and spur private investment” to help solve the crisis, White House National Economic Council Director Lawrence Summers said in an interview on Fox News Sunday two days ago.

“This year is going to be a difficult year,” Obama warned yesterday. He said he hopes businesses and consumers start spending again and “if we get things right, then, starting next year, we can start seeing significant improvement.”

To contact the reporters on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

Last Updated: February 10, 2009 07:00 EST