The US Treasury yesterday announced a plan aimed at financing as much as US$1 trillion (Dh3.67tn) to buy distressed assets from banks to help a financial system that is "still working against recovery". The Public-Private Investment Programme will use $75 billion to $100bn from the $700bn Troubled Asset Relief Programme (TARP) enacted last year, giving the government $500bn of purchasing power, the Treasury said yesterday, adding the programme may double over time.
Under the scheme, the Treasury, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) will provide capital and financing for private investors to buy illiquid loans and securities held by banks. "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 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." Timothy Geithner, the Treasury secretary, is introducing a series of strategies to remove the devalued loans and securities from banks' balance sheets, so they can resume lending and help revive the economy. The programme's dependency on private investors stepping up means it may be months before its effectiveness is known.
Private asset managers are to be chosen by May, Austan Goolsbee, a member of the White House Council of Economic Advisers, told Bloomberg Television. The announcement gave details of a strategy laid out by Mr Geithner last month, which caused a slump in stocks because there had been no explanation of how it would work. Futures on the Standard & Poor's 500 Stock Index rose 2.2 per cent to 780.60 as in early morning trading in New York. The S&P 500 has slumped 12 per cent since Mr Geithner's Feb 10 outline of the US government's plans. Yields on benchmark 10-year Treasury notes were little changed at 2.63 per cent.
With the new scheme, half of the Treasury's funds will go to a Legacy Loans Programme to be overseen by the FDIC. The Treasury will provide half of the capital going to buy 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. The FDIC, which has extensive experience disposing of devalued loans from taking over failed banks, will hold auctions for pools of loans, which will be controlled and managed by the private investors and overseen by the FDIC.
A "broad array of investors are expected to participate in the Legacy Loans Programme", 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 Programme, which aims 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 programme, the Fed will expand an existing facility that provides financing for investor purchases of asset-backed securities. The Term Asset-Backed Securities Loan Programme 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. The Treasury will also approve as many as five asset managers "with a demonstrated track record of purchasing legacy assets" to 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 per cent to as much as 100 per cent of the fund's capital. Adding to the pressure on the administration of Barack Obama, the US president, is an unprecedented wave of populist anger over the rescue so far. It began with the revelation that employees of American International Group were given $165 million in bonuses after the insurer received taxpayer funds.
Last Thursday, the House of Representatives voted 328-93 to impose a 90 per cent tax on employee bonuses paid by companies such as AIG and Fannie Mae that received more than $5bn in taxpayer assistance. That Bill has gone to the Senate. * Bloomberg
