Unveiled yesterday, Geithner's rescue plan was released with insufficient details on how the economic crisis can be solved. Main themes of the plan were more or less anticipated by the market as more injections of capitals, continued purchase of soured assets, expansion of Term Asset-backed Liquidity Facility and a more comprehensive housing program.
The newly called 'Financial Stability Plan' consisted of 4 major areas.
1. Establishing a public-private investment fund. Funding from the government and private investors will be used to purchase troubled assets. Initial funding is $500B which can grow to as much as $1T. It will target legacy loans and assets that are now burdening many financial institutions. While the idea is to remove troubled assets from banks' balance sheets, details in how it's achieved were not given.
2. Quintupling the Fed's TALF program. A consumer/business lending facility will be set up for purchase of AAA-rated asset-backed securities with the Treasury's contribution increased to $20B which will expand the size of the whole program to $ 1 trillion.
3. Stress-testing banks. Stress tests will be conducted to see if commercial banks with more than $100B in assets are in need to additional capital. If that's the case, the government will inject capital in terms of convertible securities.
4. Improving the mortgage market. The Fed and the Treasury will commit $50B to reduce monthly mortgage payments so as to prevent avoidable foreclosures.
Tumble in the stock market clearly reflected investors' opinion on the plan and most of the comments was that it is too light on details, The most critical issue on the financial crisis was toxic mortgage-backed assets. Although the government will use both public and private funds to get those problematic assets off the banks' balance sheets, there's lack of details on how the government will do so. Pricing of the assets is crucial. If the assets are pricing too low, banks will be forced to take significant writedowns.