The Obama administration on Monday offered a raft of incentives for private investors to help rid banks of up to $1 trillion in toxic assets that have plunged the world economy into crisis.
U.S. stock prices shot up, led by bank shares, as Washington ended weeks of speculation about details of its attack on the heart of the credit crisis, offering generous government financing to underpin the public-private plan.
The U.S. Treasury said it will launch the program with $75 billion to $100 billion from existing financial rescue funds with the aim of thawing the frozen market for mortgage-backed securities and other hard-to-sell assets.
President Barack Obama said the plan was critical to a U.S. economic recovery, but added, We still have a long way to go and we have a lot of work to do.
The plan is being launched in a volatile environment, with lawmakers furious about big bonus payments to executives at bailout recipient American International Group.
In an effort to spur investor participation, U.S. Treasury Secretary Timothy Geithner said private partners in the effort to revive credit markets will not face the tough executive pay restrictions that apply to recipients of government bailouts.
Public fury over the AIG bonuses led Congress to try to claw the payments bank and has made some investors wary of partnering with the government. But some of the world's most powerful investors said the plan could work.
Leading U.S. share indexes, which recently scraped 12-year lows, jumped nearly 6 percent, helped further by upbeat data on the housing market.
Analysts cautioned, however, that success will depend upon whether banks are prepared to sell assets cheaply or want to wait in the hope they can get a better price when the economy eventually recovers.
SKEPTICISM ABOUNDS ON PRICES
Nobel Prize-winning economist and New York Times columnist Paul Krugman slammed Geithner's plan.
In his Monday column, Krugman said it was a rehash of a cash-for-trash proposal the Bush administration floated last fall. He said the incentives meant investors could profit if asset values increase, but walk away if they fall.
Republicans on Capitol Hill also expressed concern over the rich incentives offered by the government, which could end up providing more than 90 percent of the funds to buy the assets.
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, said Representative Eric Cantor of Virginia, a member of the House of Representatives Republican leadership.
Geithner, who sent markets plunging on February 10 by releasing only a bare-bones outline of the plan, defended it as necessary to get the private sector involved in cleaning up the banking mess and limiting the cost to taxpayers.
The great risk that we face now is that after a long period of irresponsibility and excessive risk-taking, that the system will not take enough risk now, he told reporters in a briefing.
Investors will set the price for toxic assets through the degree of interest they show in buying them, sparing the government from having to make that decision, Geithner said.
One government aim is to get a market mechanism working to restart markets for securities not currently trading and, in the process, tamp down investor fears that some form of bank nationalization might have to be considered in the future.
TAPPING OTHER FINANCE SOURCES
As well as the initial financing from the Treasury and private investors, the Federal Deposit Insurance Corp (FDIC) -- a U.S. banking regulator -- and the Federal Reserve will be tapped to offer further financing.
Under one part of the plan focused on bad loans, the Treasury will provide up to 80 percent of initial capital alongside investment by private funds. The FDIC would then offer debt financing for up to six times the pooled amount.
A separate component, aimed at toxic securities, will have the Federal Reserve broaden its Term Asset-Backed Securities Loan Facility, or TALF. That $200 billion program will be bumped up to $1 trillion and will begin accepting older mortgage-related and other securities as loan collateral.
In addition, the Treasury will approve up to five investment managers and match their money one-for-one. It will then offer debt financing for 50 percent of the combined capital pool to buy securities banks want to unload. For details of the plan, see [ID:nN23195140]
Geithner believes the plan will help set prices for poorly performing debt left over from the U.S. housing market bust, while involving the market to avoid the risk taxpayers will overpay.
His own future is partly at stake. Geithner has come under harsh scrutiny over whether he could have stopped the AIG bonuses, and some lawmakers have called for his resignation.
Two major U.S. money managers, BlackRock and PIMCO, expressed interest in participating in the toxic-assets plan, which could produce big profits.
From PIMCO's perspective, we are intrigued by the potential double-digit returns as well as the opportunity to share them with not only clients but the American taxpayer, Bill Gross, PIMCO's co-chief investment officer, told Reuters in an interview.
Geithner said there was enough money in a $700 billion financial bailout fund approved last fall to get the program started. He added that it was too soon to say whether he would need to go back to Congress to ask for more.
(Additional reporting by Jennifer Ablan; Editing by Jonathan Oatis)