Published March 23, 2009

Wall Street awaits toxic assets plan; initial rally expected

By ANDREW MARKS
NEW YORK CORRESPONDENT

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LAST week, the Fed's big and unexpected move to purchase US$1 trillion in Treasuries and mortgage-backed securities provided the rocket fuel to keep the US stock market's nascent rally going. This week, it's Treasury Secretary Timothy Geithner and the Obama administration's turn, as Wall Street anticipates the arrival of the long awaited, much delayed plan to relieve the nation's banks of their so-called toxic assets - which published reports have said could come as early as today.

Help is on the way: The plan intends to buy US$1trillion in troubled mortgages and related assets

'This is what we've all been waiting a long time for, since the beginning of the year, really, since the beginning of October,' said Marc Pado, chief investment strategist at Cantor Fitzgerald. 'If the Street thinks the plan will help get these assets off the banks' books and get them lending again, we should get a powerful wave of buying in the market this week,' he said.

The plan intends to buy as much as US$1 trillion in troubled mortgages and related assets from financial institutions, funded by drawing on approximately US$100 billion of the remaining US$250 billion in the Troubled Asset Recovery Program, popularly known as TARP.

A 'bad bank' entity, backed by the Federal Deposit Insurance Corp, will buy and hold the loans; and the Treasury Department and Federal Reserve will use the TARP money to offer guarantee-backed loans to encourage private investors to purchase the distressed assets.

In the coming week, there will surely be more bad economic data, more of the populist uprising over AIG bonuses, along with indications from US corporations over how badly investors should expect their first and second quarter results to be.

But none of it will matter very much, at least not for the first two or three days of the week, traders said.

Since last autumn when the TARP plan was first formed, industry analysts on Wall Street and policymakers in Washington have argued that the mountain - estimates run as high as US$2 trillion - of non-performing mortgages and other asset-backed securities weighing so heavily on bank balance sheets lies at the heart of the credit crisis.

Wall Street's reception to the plan will be crucial to the rally. 'The problem for the administration is that because they've waited so long and delayed so long in providing details, they've raised expectations and frustration levels,' noted Ethan Harris, chief US economist at Barclays. 'The investment community is primed to tear the plan apart and criticise its weaknesses rather than just saying 'oh thank God, help is finally here', so we could see some pullback after the initial rally the plan is likely to induce,' he said.

Indeed, the government has used up much of the goodwill accumulated by President Barack Obama during his election campaign from both Wall Street and Main Street that the administration now has to walk a careful line over how much money it throws at the imperilled banks, given the popular distaste for aiding the banks and corporations that have helped bring about the economic misery that has cost so many Americans their retirement savings and their jobs.

Last Friday, that negative dynamic was clearly in play as the two-week rally that has helped US stock investors recover a dollop of optimism, along with a fraction of the money lost over the past six months, showed signs of fraying.

The Dow Jones Industrial Average lost 122.4 points, or 1.7 per cent, to 7,278 points, leaving it still nearly 800 points higher than its recent low of 6,440.08, set on March 9. The Nasdaq dipped 26.2 points, or 1.8 per cent, to 1,457 while the S&P 500 ended the day down 15.5 points, or 2 per cent, to 768.54.

For the week, the Dow Jones Industrial Average gained 0.7 per cent while the broader S&P 500 Index rose 1.6 per cent and the Nasdaq Composite Index posted a weekly gain of 1.8 per cent.

The stock market's full focus will be on the toxic asset plan in the early part of the week, but with first-quarter earnings season slated to begin in just two weeks, investors will soon have more gloom and doom to occupy their attention.

'It will be a struggle between bullishness around relieving the credit freeze and bearishness over the extent and length of the recession and what it's doing to corporate earnings,' said Mr Pado.