News
Email
Print
Wall Street gets its tonic
Stocks jump on news of government plan to help buy banks' toxic assets
ADVERTISEMENT
RELATED MULTIMEDIA
RELATED INFORMATION
Published: March 24, 2009
WASHINGTON
The Obama administration presented a plan yesterday to take over as much as $1 trillion in toxic mortgage securities with the help of private investors. For once, Wall Street cheered.
The announcement, closely stage-managed throughout the day, filled in blanks in the administration's financial-rescue package and formed what President Obama called "one more critical element in our recovery."
The effort by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. relies on a mix of government and private money -- mostly from institutional investors such as hedge funds -- to help banks rid their balance sheets of real-estate related securities that are now extremely difficult to value.
The goal, Obama said, is to get banks lending again, so "families can get basic consumer loans, auto loans, student loans, (and so) that small businesses are able to finance themselves, and we can start getting this economy moving again."
The plan was like a tonic to Wall Street, which had panned an earlier outline of the program that lacked detail.
Stocks rose sharply. The Dow Jones industrial average shot up nearly 500 points, thanks to the bank-assets plan and a report showing an unexpected increase in home sales.
The introduction of the plan was closely choreographed so that the president -- rather than Treasury Secretary Timothy Geithner -- would be the first administration official to appear on camera at midday to discuss it. Geithner met earlier in the day, before markets opened, with a group of reporters at the Treasury Department to go over specifics. Cameras and broadcast-quality audio recorders were barred.
It was the opposite of what happened Feb. 10. Then, after Obama had helped raise expectations toward Geithner and the plan, Geithner went before cameras and bombed. The Dow fell about 300 points amid investor confusion about details.
The fleshed-out plan is meant to help fix a value on damaged mortgage loans and other toxic securities.
If the value of the securities goes up, the private investors and taxpayers would share in the gains. If the values go down, the taxpayers and private investors would incur losses.
"This will help banks clean up their balance sheets and make it easier for them to raise capital," Geithner said.
The plan will take from $75 billion to $100 billion from the government's $700 billion Troubled Asset Relief Program. The government will pair this with private money and loans from the FDIC and the Fed to generate $500 billion in buying power.
Geithner said that purchases could eventually grow to $1 trillion -- about half of the estimated $2 trillion of toxic assets on bank books now.
On the hot seat, Geithner has a lot personally tied to the success of the program. His performance in the Cabinet, including his slowness in learning about multimillion-dollar executive bonuses paid by insurance company AIG after taking bailout money, has been severely criticized by some in Congress. Geithner is to testify today before the House Financial Services Committee.
Under a typical transaction, for every $100 in soured mortgages being bought from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan.
The plan was introduced ahead of a summit next week in London of 20 major and developing economies struggling with the global recession.
Obama is trying to get other wealthy countries to do more to stimulate their economies with government spending, as the United States has done. However, other countries, particularly in Europe, are resisting U.S. calls for more stimulus and would prefer to see more internationally coordinated bank regulation.
Federal Deposit Insurance Corp. Chairman Sheila Bair said that she expects her agency will finance as much as $500 billion in purchases of residential and commercial real-estate loans.
Bair said that the program should help banks clean up their balance sheets and raise fresh capital, but she added that "there may be some banks beyond help." The agency has said before that it expects more bank failures, she said.
A joint statement by the Federal Reserve and Treasury Department said that the Fed should play a "central role" in preventing future financial crises. That implied a wish that Congress expand the Fed's authority in regulating all financial institutions, not just banks.
Geithner said that taxpayers could still lose money on the deal to soak up bad assets but there was no fixing the system without risk.
Other options, such as having the government buy the securities outright or letting them languish on banks' balance sheets, would pose even greater vulnerabilities, he said, and it was important to find the right blend of risk versus reward.
"I am very confident this scheme dominates all the alternatives for trying to find that balance," he said.
That sentiment was echoed by congressional Democrats, who said that risk seems inevitable with any plan big enough to work.
Not everyone agreed. House Republican Whip Eric Cantor of Virginia called Obama's plan a "shell game" that hid the true cost.
He said he hoped that the administration would consider instead an earlier Republican proposal to set up a government-sponsored insurance program for mortgage-related securities.
The administration plan "seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer," Cantor said in a statement.
Email
Print
