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WORLD> America
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Dow jumps as Obama admin. moves on bad bank assets
(Agencies)
Updated: 2009-03-24 07:51 "This will help banks clean up their balance sheets and make it easier for them to raise capital," Geithner said. The plan will take $75 billion to $100 billion from the government's existing $700 billion Troubled Asset Relief Program. The government will pair this with private investments and loans from the FDIC and the Fed to generate $500 billion in purchasing power. Geithner said purchases eventually could grow to $1 trillion -- roughly half of the estimated $2 trillion of toxic assets on bank books now.
On the hot seat, Geithner has a lot personally tied to the success of the new program. His performance in the Cabinet, including his slowness in learning about multimillion dollar executive bonuses paid by insurance giant AIG after taking bailout money, has been severely criticized by some in Congress. Geithner testifies on Tuesday before the House Financial Services Committee. Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan. The plan was introduced ahead of a summit next week in London of 20 major and developing economies struggling with the global recession. Obama is trying to get other wealthy countries to do more to stimulate their economies with government spending, as the United States has done. However, other countries, particularly ones in Europe, are resisting US calls for more stimulus and would prefer to see more internationally coordinated bank regulation. The administration was expected to outline its plan for financial regulation overhaul later this week. Federal Deposit Insurance Corp. Chairman Sheila Bair said she expects her agency will finance as much as $500 billion in purchases of residential and commercial real estate loans. Bair said the program should help banks clean up their balance sheets and raise fresh capital, though she added that "there may be some banks beyond help." The agency has said before it expects more bank failures, she said. A joint statement by the Federal Reserve and Treasury Department said the Fed should play a "central role" in preventing future financial crises. That implied a wish that Congress expand the Fed's authority in regulating all financial institutions, not just banks. Geithner said taxpayers still could lose money on the deal to soak up bad assets but there was no fixing the system without risk. Other options, such as having the government purchase the securities outright or letting them languish on bank balance sheets, would pose even greater vulnerabilities, he said, and it was important to find the right blend of risk versus reward. "I am very confident this scheme dominates all the alternatives for trying to find that balance," he said. The sentiment was echoed by congressional Democrats, who said risk seemed inevitable with any plan big enough to work. But House Republican Whip Eric Cantor of Virginia called Obama's plan a "shell game" that hid the true cost. He said he hoped the administration would consider instead an earlier Republican proposal to set up a government-sponsored insurance program for mortgage-related securities. The administration plan "seems to offer little incentive for private investors to participate unless the subsidy is made so rich that it comes at the expense of the taxpayer," Cantor said in a statement. The new program marks a return by the government to a strategy of acquiring toxic securities. Henry Paulson, who was treasury secretary in the final days of the Bush administration, abandoned plans to purchase these securities, largely because they were impossible to price. The plan builds on earlier programs to pump money into banks, help some homeowners repay their mortgages and stimulate college, small business and other forms of lending. "There's still great fragility in the financial systems, but we think that we are moving in the right direction," Obama said after meeting Geithner and Fed Chairman Ben Bernanke. Obama said the plan will allow taxpayers to "share in the upside as well as the downside." Treasury officials had no firm forecast on when the government would begin making the asset purchases although market expectations were that the process could begin within weeks.
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