23 March 2009
Treasury Announces $500 Billion Program to Buy Up Bad Assets
Plan combines government and private sector to spread risks
Washington — In another step to turn the U.S. economy around, the U.S. Treasury is launching a program to buy up about $500 billion in bad bank assets to further ease credit for consumers and businesses.
“There is no doubt the government is taking risks. You can’t solve a financial crisis without the government taking risks,” Treasury Secretary Timothy Geithner said March 23.
President Obama said March 23 at the White House that the federal government has taken a series of steps to improve liquidity in secondary markets that had been completely frozen.
“And this morning, Secretary Geithner announced the latest element in this multipronged approach,” the president said, “and that is a mechanism that he, in close consultation with the Federal Reserve and the [Federal Deposit Insurance Corporation], has initiated in order to allow banks to take some of their bad assets off their books, sell them into a market, but do so in a way that doesn’t just obligate taxpayers to buy at whatever price they’re willing to sell these assets; instead, [it] involves a public-private partnership that allows market participants who have every interest in making a profit to accurately price these assets so that the taxpayers share in the upside as well as the downside.
“And we believe that this is one more element that is going to be absolutely critical in getting credit flowing again.”
The U.S. government will use $75 billion to $100 billion from the government’s existing $700 billion bailout program created in 2008 to buy up bad assets, many of which are the result of subprime rate mortgages that are in danger of default. The program could be expanded to $1 trillion over time, the Treasury said in a fact sheet.
Much of the problem began in 2007 when U.S. housing prices began falling, generating heavy losses for investors and banks, the Treasury fact sheet said. The new Treasury program is being called the Public-Private Investment Program.
The program will be supported by loans from the Federal Deposit Insurance Corporation, which insures the deposits at the nation’s banks. The FDIC will operate auctions of troubled mortgage loans and then provide financing to the winning bidders.
A special loan facility operated by the U.S. Federal Reserve — the Term Asset-Backed Securities Loan Facility — will receive $200 billion from the $700 billion bailout plan to enable the Fed to support as much as $1 trillion in loans to investors who want to buy securities backed by a variety of consumer loans.
Part of the strategy, Geithner said, is to get private market participants to bid against each other to set prices, known as price discovery, for which the bad assets will be bought.
According to the Treasury, the plan is designed to get maximum effect from the bailout funds, spread risks and profits with the private sector, and allow the private sector to establish the price of loans and securities bought under the program.
“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 in a fact sheet. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis.”
If the federal government acts alone and buys up all the bad assets, U.S. taxpayers will take on all the risks, including the risk that taxpayers will overpay if the government is setting the price, the Treasury said.
“What the government is going to try to do, partnering with private investors, is go into this market, jump-start it, and give banks a way to sell these things off,” Christina Romer, head of the White House Council of Economic Advisers, said in an interview on the NBC television network’s Today Show March 23. “Once they’re off, I think the key thing is then banks feel much more comfortable about lending to ordinary Americans and American businesses.”
STRESS TESTING
Financial stress testing of banks is becoming a widely used tool to assess potential vulnerabilities in a financial system. Nineteen of the biggest banks in the United States are undergoing intense tests by federal regulators to be completed by the end of April, according to the Federal Reserve, the country’s central bank.
The testing is designed to determine how much stress a commercial bank can sustain and how short of capital it would become over a two-year period if the recession should worsen. Banks being tested hold assets of more than $100 billion. They comprise two-thirds of the bank holding company assets in the United States, the Fed said in a fact sheet.
The Obama administration is working to prepare its proposed overhaul of federal financial regulations by the April 2 meeting in London of the G20 group of advanced and large developing economies. European nations have sought to strengthen their financial regulations and have asked the same thing of the United States.
