Special Report: Global Financial Crisis
by Xinhua writer Liu Hong
WASHINGTON, March 23 (Xinhua) -- The Obama
administration on Monday unveiled details of a toxic asset rescue plan, taking a
bold step to cleanse from bank balance sheets bad assets that have frozen up
lending and fueled the recession.
The Treasury said the three-part program will provide
financing through the Federal Reserve and the Federal Deposit Insurance
Corp.(FDIC) to help public-private investment partnerships buy up to 1 trillion
dollars in distressed loans and securities.
THREE-PART PROGRAM
At the core of the financing package will be 75
billion to 100 billion dollars in capital from the financial bailout package,
which was known as the TARP, or the Troubled Assets Relief Program, along with
the share provided by private investors.
"Using 75 billion to 100 billion dollars in TARP
capital and capital from private investors, the Public-Private Investment
Program will generate 500 billion dollars in purchasing power to buy legacy
assets with the potential to expand to 1 trillion dollars over time," said the
Treasury in a statement.
"This approach is superior to the alternatives of
either hoping for banks to gradually work these assets off their books or of the
government purchasing the assets directly," it said. "Simply hoping for banks to
work legacy assets off over time risks prolonging a financial crisis, as in the
case of the Japanese experience."
According to the Treasury, the new long-awaited
program will have three major parts:
-- A public-private partnership to back private
investors' purchases of bad assets, with the Treasury support coming from
the700-billion-dollar financial bailout fund. The government would match private
investors, such as hedge funds, dollar for dollar and share any profits equally.
-- Expansion of a recently launched Federal Reserve
program that provides under its new Term Asset-Backed Securities Loan Facility,
or TALF. Under the new program, the TALF will also address the broken markets
for securities tied to residential and commercial real estate and consumer
credit.
-- Use of the FDIC, which insures bank deposits, to
extend loans to support purchases of toxic assets. The FDIC would also share the
risks if the mortgages fell further in value.
According to the Treasury, it works like this: if a
bank has a pool of residential mortgages with 100-dollar face value that it is
seeking to divest, the bank would approach the FDIC.
The FDIC would determine, according to the above
process, that they would be willing to leverage the pool at a 6-to-1
debt-to-equity ratio. The pool would then be auctioned by the FDIC, with several
private sector bidders submitting bids.
Suppose the winning bidder offered 84 dollars, the
FDIC would provide guarantees for 72 dollars of financing, leaving 12 dollars of
equity. The Treasury would then provide 50 percent of the equity funding
required on a side-by-side basis with the investor. In this example, Treasury
would invest approximately 6 dollars, with the private investor contributing 6
dollars.
"Over time, by providing a market for these assets
that does not now exist, this program will help improve asset values, increase
lending capacity by banks, and reduce uncertainty about the scale of losses on
bank balance sheets," Treasury Secretary Timothy Geithner wrote on Monday's Wall
Street Journal.
"The ability to sell assets to this fund will make it
easier for banks to raise private capital, which will accelerate their ability
to replace the capital investment provided by the Treasury," he said.
U.S. President Barack Obama also hailed the latest
plan, saying he was "very confident" that it will work. "We believe this is one
more element that is going to be absolutely critical in getting credit flowing
again," Obama spoke briefly to reporters after meeting his economic advisors at
the White House.
"It's not going to happen overnight, there is still
great fragility in the financial systems but we think that we are moving in the
right direction," said the president.
GREETED WITH
SKEPTICISM
Geithner also acknowledged the uncertainties inherent
in the new program, but defended it on Monday as a practical approach.
"There is no doubt the government is taking risk,"
Geithner said at a press conference. "You cannot solve a financial crisis
without the government assuming risk."
Treasury officials are betting that the current low
market prices for these assets are driven more by excessive fear than the
reality of how the economy will perform, and that the new purchases will help
kick-start those markets and return them to more normal functioning, according
to U.S. media.
"It is going to be an open bid. That's part of why
we're going in with the private sector," said Christina Romer, head of the White
House Council of Economic Advisors. "They're going to have money on the line
just like we are and the whole idea is to make sure we don't overpay for them."
Two of the largest U.S. money managers, Black Rock
and PIMCO, also expressed interest in participating in the plan.
"This is perhaps the first win/win/win policy to be
put on the table and it should be welcomed enthusiastically. We intend to
participate and do our part to serve clients as well as promote economic
recovery," Bill Gross, PIMCO's co-chief investment officer told reporters.
"We are very supportive," said Scott Talbott, senior
vice president of government affairs for the Financial Services Roundtable. "We
think it is a useful tool in the arsenal against liquidity problems."
U.S. stocks staged the strongest rally this year on
Monday, a sign that Wall Street was optimistic about the new program. All major
indexes jumped more than 6 percent, as big banks such as Citigroup, JPMorgan and
Bank of America climbed over 20 percent.
However, one particularly treacherous hurdle for the
plan is how to persuade the private investors to come to the table.
"After last week's high-volume debate over bonus
payments to AIG employees, hedge funds and private equity firms may be reluctant
to play ball, for fear that the government will change terms of the deal
retroactively," said the Washington Post in a report.
Some lawmakers also expressed skepticism about the
new plan. House Republican Whip Eric Cantor called it a "shell game" that hid
the true cost.
"As described, the 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 ina statement.
Nobel economics laureate Paul Krugman slammed that
the plan was based on "financial policy despair."
"The Geithner scheme would offer a one-way bet: if
asset values go up, the investors profit, but if they go down, the investors can
walk away from their debt," Krugman wrote in the New York Times.
"So this isn't really about letting markets work.
It's just an indirect, disguised way to subsidize purchases of bad assets," he
added.
U.S. stocks surge on toxic asset plan,
home sales
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The Dow Jones Industrial Average is seen
on a digital display at the New York Stock Exchange March 23,
2009. (Xinhua Photo)
Photo
Gallery>>> |
NEW YORK, March 23 (Xinhua) -- U.S. stocks staged the
strongest rally this year on Monday as the market was boosted by U.S.
government's latest plan on clearing bad bank assets and a larger-than-expected
rise in existing home sales.
S&P 500 indexes jumped more than 7 percent, while
Dow surged nearly 500 points. Full story
New York gold futures fall as stocks
soar
CHICAGO, March 23 (Xinhua) -- The gold market in New York
spent most of the trading session lower on Monday as equities rallied.
Gold futures for April delivery fell 3.70 dollars, or
0.4 percent, to 952.50 dollars an ounce on the New York Mercantile
Exchange. Full story
Obama "very confident" toxic asset
plan will work
WASHINGTON, March 23 (Xinhua) -- U.S. President Barack
Obama said on Monday that he was "very confident" that the latest plan to clean
up toxic assets from bank balance sheets will work.
"We believe this is one more element that is going to be
absolutely critical in getting credit flowing again," Obama spoke briefly to
reporters after meeting with his economic advisors at the White House. Full story
