Private investors to be roped in; market celebrates clarity as a long wait ends
By ANDREW MARKS
NEW YORK CORRESPONDENT
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US Treasury Secretary Timothy Geithner finally unveiled details of the plan that the world has been waiting for. Aimed sharply at buying up the so-called toxic assets that have weighed so heavily on the balance sheets of US banks, it brought a measure of clarity to investors and saw Wall Street and bourses worldwide rally with relief. It could prove to be a major turning point in the long trek back to normality.
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The plan, announced shortly before yesterday's opening bell on the New York Stock Exchange, will provide US$500 billion in financing to private investors to get them to purchase the banks' distressed assets. The Treasury Department said that the programme could be expanded to as much as US$1 trillion.
The key element of the government's financing package is US$75 billion to US$100 billion in capital from the current bank bailout programme, known as TARP, the Troubled Assets Relief Program, which has already provided US$500 billion in equity and aid to embattled banks.
The government expects that private investors will provide about 5 per cent or more of the funds to buy distressed assets. By leveraging this programme through the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, huge amounts of bad loans can be acquired.
Under the plan, while the Treasury and private capital will provide equity financing, the FDIC is to guarantee the debt financing issued by the public-private investment funds to fund asset purchases. The private investors would be subsidised, but could stand to lose their investments, while the taxpayers could share in prospective profits as the assets are eventually sold, the Treasury said.
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The announcement of the programme sent Wall Street into powerful rally mode yesterday morning. US stocks joined rallying bourses in Asia and Europe, which had already burst into a powerful round of stock buying and optimism ahead of the formal unveiling of the plan.
The Dow Jones Industrial Average burst out of the gates, posting a 212-point, or 2.92 per cent, gain in the first half-hour of trading, rising to 7,490.8. The broader S&P 500 was faring even better than blue chips, rising 24.55 points, or 3.19 per cent, to 793.09, while the technology-heavy Nasdaq composite index was charging ahead with a gain of 41.3 points, or 2.83 per cent, to 1,498.56.
Earlier, Asian markets rose with Tokyo jumping 3.39 per cent despite a sharp fall in business confidence, while Hong Kong soared 4.78 per cent and Sydney rose 2.4 per cent. Europe then took up the baton, with London up 3.44 per cent, Paris gaining 2.25 per cent and Frankfurt adding 2.38 per cent.
'This is it, the government move we've been waiting for basically since Lehman Brothers went under,' said a clearly elated Marc Pado, chief investment strategist at Cantor Fitzgerald. 'Wall Street was befuddled when (former Treasury secretary Henry) Paulson changed his mind and used the TARP funds to inject equity into the banks and buy up the bad loans on the banks' book, and the delay by the new administration in coming up with a toxic asset plan has kept Wall Street frustrated and made investors keep their money on the sidelines until we got some clarity.'
'Now we're finally getting the clarity, and the stock market is enthusiastically embracing it,' Mr Pado added. 'In the coming days, you'll see some critiquing of the plan and maybe even some pullback from today's rally, but this plan is going to have a long-term beneficial impact on stocks. Investors will be more willing to shift back into the stock market now.'
Indeed, money manager Hugh Johnson, who manages about US$2 billion as the chief investment strategist at Johnson Illington Advisors, said he's now ready to 'pull the trigger' and start recommending clients increase their stock weightings. 'We've been waiting for this a long time, it's a key element to bringing stability to the financial system,' he said. 'I don't know that this means stocks can go straight up from here - in fact I doubt that very much, with the economy continuing to decline - but it takes enough risk out of the equation that we can start adding stocks to our portfolios,' he said.
Critics of the plan complain that the government should set up a 'bad bank' as was originally intended back in September when TARP was first being put together, and purchase the toxic securities alone.
But for yesterday at least, Wall Street was only interested in celebrating the plan, designed to leverage the government's dwindling TARP funds, prodding private investors to take some of the toxic debt off bank balance sheets with low interest financing and guarantees backstopping the investments.
'Tomorrow we'll start the deeper analysis, today it's just relief and optimism,' said Jack Ellison, a trader at Jupiter Capital Management.
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