New Treasury chief promises full force of government to get economy back on track
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(WASHINGTON) In a decision closely watched around the world, the US Treasury yesterday unveiled an aggressive financial rescue plan of up to US$1 trillion to scrub toxic assets from the books of banks. To help thaw credit markets, there will also be government support for US$1 trillion in new consumer and business lending.
The renamed 'Financial Stability Plan,' rolled out by Treasury Secretary Timothy Geithner at the US Treasury, will also devote US$50 billion in federal rescue funds to try to stem home foreclosures and soften the crushing impact of the deep housing crisis now afflicting the entire economy.
Mr Geithner said the plan would 'bring the full force of the United States government to bear to strengthen our financial system so that we get the economy back on track'.
A key element will be a public-private investment fund of an initial US$500 billion, but with the potential to expand up to US$1 trillion, to help cleanse the banking system of toxic real-estate assets.
This will serve the role of an aggregator bank, or 'bad bank' to help financial institutions value their mortgage securities and clean up their balance sheets.
A second element will include additional capital injections into banks.
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'While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive 'stress test' will have access to a Treasury-provided 'capital buffer' to help absorb losses and serve as a bridge to receiving increased private capital,' he said.
The third component of the Treasury's strategy will expand a programme to boost lending for mortgages and other consumer and business loans to up to US$1 trillion.
'This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again,' Mr Geithner said.
The Treasury's new investments in banks, in the form of convertible preferred securities, will be placed in a Financial Stability Trust, Mr Geithner said.
'The financial system is working against recovery and at the same time the recession is putting greater pressure on banks,' he said. 'It is essential for every American to understand that the battle for economic recovery must be fought on two fronts' - job creation and reviving credit markets, he said.
Fresh taxpayer funds come with tighter restrictions on banks, including limits on dividend payments, acquisitions and executive pay.
After Mr Geithner's announcement, stock prices fell further and the dollar extended losses while prices for US Treasury debt securities extended gains.
James Ellman, president of Seacliff Capital in San Francisco, said: 'Investors want clarity, simplicity, and resolution. This plan is seen as convoluted, obfuscating, and clouded.'
Mr Geithner acknowledged deep scepticism has developed over the fairness and efficiency of a US$700 billion bank bailout programme approved by Congress in October. He said leaders of some financial institutions that have received money had squandered the good faith that is needed to make the bank rescue effective. 'The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust,' he said.
The revamped approach to the government's financial rescue war chest would use US$100 billion to cover risks the Fed would take in expanding a US$200 billion programme supporting consumer and small business lending to a US$1 trillion programme that also supports an array of mortgage-related assets.
Markets appeared caught off balance by some of the measures that Mr Geithner offered.
'Just a day ago, they were talking about good bank and bad bank. Now they come up with something completely new,' said Robert Brusca, chief economist for Fact and Opinion Economics in New York. -- Reuters, Bloomberg, AFP
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