The U.S. Treasury Department unveiled its plan to deal with the toxic assets weighing on banks' balance sheets Monday, acknowledging that the financial system continues to face "acute pressure" and is working against economic recovery.

The coordinated effort of the Treasury, Federal Reserve and Federal Deposit Insurance Corp. will attempt to address the issue of "legacy" real-estate related assets that Treasury Secretary Timothy Geithner said is reducing banks' willingness to take risks and to lend money to consumers.

"This will help banks clean up their balance sheets and make it easier for them to raise private capital," Geithner said.

The plan calls for the federal government to work with private investors to try to restart the market for the troubled mortgage loans and securities, which in turn officials hope improves the financial condition of banks that have received billions in capital injections from the government already. The federal government will pair up to $100 billion with private capital to generate $500 billion in purchasing power to buy the assets, and Geithner told reporters the plan could reach up to $1 trillion in size over time.

"We have to complement this program with a range of approaches to help get these securities markets back to a point where they're working again," Geithner told reporters Monday morning.

The new program marks a return by Treasury to dealing with the illiquid assets that have snagged credit markets. Former Treasury Secretary Henry Paulson abandoned plans to deal with the toxic assets last year, in part because of the difficulty of determining a proper price for assets where no market currently exists.

Geithner said Treasury hopes the program will unfreeze the market for the assets. He said alternative proposals - letting the assets fester on bank balance sheets or having the government directly purchase them - would put too much risk on the backs of taxpayers. The government needs to balance the potential losses for taxpayers with the need to get credit markets functioning once again.

"I am very confident this scheme dominates all the alternatives for trying to find that balance," Geithner said.

Highlighting the policy choices the U.S. is making, Geithner and Treasury referenced previous banking crises in Japan and Sweden as providing lessons in the current turmoil. Treasury documents released Monday said that letting illiquid assets sit on bank balance sheets "risks prolonging a financial crisis, as in the case of the Japanese experience" throughout the 1990s. Geithner, discussing the issue with reporters, warned against taking the opposite strategy from the Japanese and being too aggressive with government intervention.

"We're not Sweden, we have a very complicated financial system," Geithner said, referencing that country's move in the early 1990s to effectively nationalize some banks.

The new program has two parts. It will address both the legacy loans banks are holding on their balance sheets and the legacy securities backed by mortgage-related debt clogging the balance sheets of financial firms.

Under the legacy loan program, investment funds will be created to purchase pools of assets. Treasury will provide 50% of the equity capital for each fund while private managers retain control of asset management subject to FDIC oversight. Treasury said it will approve up to five asset managers "with a demonstrated track record of purchasing legacy assets," but it might consider adding more managers depending on the quality of applications received. To be pre-qualifed as a fund manager, the manager must submit an application to Treasury by April 10.

Notably, the asset managers will not be subject to executive compensation requirements that have come into focus in recent weeks after American International Group Inc. (AIG) sparked a public outcry by paying out $165 million in retention bonuses to top executives.

Banks will identify the assets they wish to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio, the Treasury Department said. Meanwhile, the highest bidder will have access to the Public-Private Investment Program to fund 50% of the equity requirement of their purchase.

Eligible assets will be determined by banks, regulators, the FDIC and the Treasury Department.

"A broad array of investors are expected to participate in the Legacy Loans Program," Treasury said in a fact sheet it provided Monday. "The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged."

Under the legacy securities program, non-recourse loans will be made available to investors to fund purchases of legacy securitization assets. Eligible assets are expected to include certain non-agency residential mortgage-backed securities that were originally rated AAA and outstanding commercial mortgage-backed securities and asset-backed securities that are rated AAA.

-By Maya Jackson Randall and Michael Crittenden, Dow Jones Newswires; 202-862-9255,