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Positive reaction to US plan to buy one trillion USD in toxic assets

Monday, March 23rd 2009 - 22:44 UTC
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US Treasury Secretary Timothy Geithner US Treasury Secretary Timothy Geithner

United States announced Monday details of a plan to buy up to one trillion US dollars worth of toxic assets to help repair banks' balance sheets. The “Public-Private Investment Programme” will purchase the troubled mortgages and securities that have been at the root of the credit crunch.

The Treasury has committed 75 to 100 billion to the program and said the private sector would also contribute. Investors welcomed the news, with stocks rising in Europe and Asia. The Treasury said the plan would help the financial system recover.

US banks still hold many mortgage-related assets that they cannot value or sell.

Having so many of so-called toxic assets on their books has made them reluctant to lend, causing the financial system to freeze up, and pushing the economy further into recession.

“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 the financial crisis,” it added.

The 75 to 100 billion will come from the Treasury's 700 billion Troubled Asset Relief Program (Tarp), which has already been approved by Congress.

Low-interest loans will also be offered to private investors via the Federal Reserve and the FDIC to encourage them to take part in the scheme, by lending them the bulk of the money to purchase the toxic assets.

That way, the money will initially provide the “purchasing power” to buy 500 billion of toxic assets, with the potential to expand up to one trillion US dollars.

“Over time, by providing a market for these assets that does not now exist, this programme will help improve assets values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets,” US Treasury Secretary Timothy Geithner wrote in the Wall Street Journal before the programme was officially announced.

Mr Geithner added that the plan was needed because the US financial system as a whole was “still working against recovery” and “many banks, still burdened by bad lending decisions, are holding back on providing credit”.

He said that encouraging the private sector to take part would be better for the taxpayer as the risks of purchasing toxic assets would be shared.

BBC business editor Robert Peston said the aim of the plan is to remove as many bad assets as possible from banks' balance sheets.

This should mean that banks become less anxious about future write-offs and become more confident that they have the capital resources to re-start lending.

It is an alternative approach to that taken by the UK Treasury, which has used taxpayer's money to insure Royal Bank of Scotland and Lloyds Banking Group against future losses on some £600 billion in poor loans and investments, he added.

The markets have been eagerly awaiting the details of the US plan to tackle bank's toxic assets, which have been seen as a drag on world recovery.

Stocks rose worldwide on hopes that the plan would go some way to cleaning up the world financial system. The FTSE 100 of leading UK shares was up 1.1%, or 42.31 points, at 3885.16.

The price of crude oil also hit its highest in almost four months at close to 53 US dollars a barrel on optimism the plan would help the US climb out of recession.

The plan was originally announced in February, shortly after Mr Geithner took up his post as Treasury Secretary but details were scant on how it would work.

The Bush administration abandoned its earlier plans to buy up toxic assets in October 2008, and decided instead to use funds from the Tarp programme to take stakes in banks.

The US administration has been under pressure to bring forward its plans for the bank rescue before the G20 summit takes place in London in April, and G20 finance ministers urged action by the US at their meeting in Horsham last week.

Over the weekend, administration officials dismissed fears that private investors would be reluctant to participate in the rescue plan because of the fall-out over the bonuses issues.

Austan Goolsbee, a member of the Council of Economic Advisors, said that such investors “would be treated totally differently than companies like AIG or Fannie Mae, where they are only in business because the government saved them”.

Categories: Economy, United States.

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