The U.S. Treasury announced a plan aimed at financing as much as $1 trillion in purchases of distressed assets to help a financial system that is “still working against recovery.”
The Public-Private Investment Program will use $75 billion to $100 billion from the $700 billion Troubled Asset Relief Program enacted last year, giving the government “purchasing power” of $500 billion, the Treasury said today in a statement in Washington. The program may double “over time,” it said.
Treasury Secretary Timothy Geithner is deploying an array of tactics to remove the devalued loans and securities from banks’ balance sheets so they can start lending again and help resuscitate the economy. Because the program depends on private investors stepping up, it may be weeks or months before it’s clear whether the approach will work.
“You will start to see this buying up the assets” shortly after private asset managers are chosen by May, Austan Goolsbee, a member of the White House Council of Economic Advisers, said in an interview with Bloomberg Television.
Today’s provides more details on an initial strategy laid out by Geithner last month, which caused a slump in stocks because it lacked an explanation of how the effort would work.
Futures on the Standard & Poor’s 500 Stock Index rose 2.2 percent to 780.60 as of 8:58 a.m. in New York. The S&P 500 has slumped 12 percent since Geithner’s Feb. 10 outline of the Obama administration’s plans. Yields on benchmark 10-year Treasury notes were little changed at 2.63 percent.
The Treasury, Federal Reserve and Federal Deposit Insurance Corp. will provide capital and financing for private investors to buy illiquid loans and securities held by banks, according to today’s 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,” the Treasury statement 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.”
Half of the Treasury’s funds will go to a “Legacy Loans Program” that will be overseen by the FDIC. The Treasury would provide half of the capital going to purchase a pool of loans from banks, with private fund managers putting up the rest. The FDIC will then guarantee financing for the investors, up to a maximum of six times the capital, or equity, provided.
FDIC Role
The FDIC, which has extensive experience disposing of devalued loans from taking over failed banks, will hold auctions for the pools of loans, which will be controlled and managed by the private investors with oversight by the FDIC.
A “broad array of investors are expected to participate in the Legacy Loans Program,” the Treasury said, encouraging insurance companies, pension funds and even individual investors to join in.
The second half of the Treasury’s contribution will go to the “Legacy Securities Program.” The objective of the initiative is to generate prices for securities backed by mortgages that are no longer traded because investors have little confidence about the underlying value of the home loans.
Under this program, the Fed will expand an existing facility that provides financing for investor purchases of asset-backed securities. The Term Asset-Backed Securities Loan Program will be broadened to take on assets such as residential and commercial mortgage-backed securities that were originally rated AAA and sold by private banks.
Asset Managers
The Treasury will also approve as many as five asset managers “with a demonstrated track record of purchasing legacy assets” that will buy the securities.
The managers will be given time to raise private capital and receive matching funds from the Treasury. They will also be able to get “senior debt” from the Treasury of 50 percent to as much as 100 percent of the fund’s capital.
Adding to the pressure on the administration is an unprecedented wave of populist anger over the rescue thus far, following the revelation that employees of American International Group Inc. got $165 million in bonuses after the insurer received taxpayer funds.
On March 19, the House voted 328-93 to impose a 90 percent tax on employee bonuses paid by companies such as AIG and Fannie Mae that received more than $5 billion in taxpayer assistance. The Senate is considering similar legislation.
Congressional Concern
The backlash on Capitol Hill means private firms may think twice about taking part in Geithner’s public-private partnership, even though government financing will limit their risk and increase the potential of earning profits, David Kotok, chairman and chief investment officer of Cumberland Advisors Inc., in Vineland, New Jersey, said before today’s release.
Goolsbee expressed confidence that private investors will step up.
“The private sector will compete to be partners with the government,” Goolsbee predicted. “I don’t believe they should expect to be treated the same way as a deadbeat type of institution like AIG or Fannie Mae. Those couple of businesses are only in existence because the government has bailed them out.”
No comments:
Post a Comment