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WASHINGTON: US authorities on Monday unveiled a much-awaited plan using public and private capital to soak up toxic assets clogging the banking system, the latest move in multi-pronged effort to ease a credit crunch and steady the economy.
The cornerstone of the plan is a "Public-Private Investment Programme for Legacy Assets" funded with 75 to 100 billion dollars from the government - an idea that has generated some praise but also skepticism.
Officials said this approach would bring in private investors to "generate 500 billion dollars in purchasing power" and could expand to one trillion dollars.
The plan, the outlines of which were announced last month, is a key to helping the ailing banking system recover from massive losses suffered in the US real estate meltdown and stabilising the economy.
Treasury Secretary Timothy Geithner said the plan "will help banks clean up their balance sheets" and thereby increase credit available to help revive the recession-mired economy.
"We're going to put capital alongside capital from private investors with financing from the government," he said. "So private investors will share the risk alongside with the taxpayer, and the taxpayer will share returns alongside private investors."
President Barack Obama said he was "very confident" that his administration's new plan to cleanse banks of toxic assets would help thaw frozen credit markets currently hampering recovery.
"We believe this is one more element that is going to be absolutely critical in getting credit flowing again," said Obama.
"It's not going to happen overnight, there is still great fragility in the financial system but we think that we are moving in the right direction."
A Treasury statement said that "a broad array of investors are expected to participate" in the programme including individual investors, pension plans, insurance companies and other long-term investors.
The Treasury and private capital will provide equity financing and the Federal Deposit Insurance Corp. will provide a guarantee for debt financing, which will be used to buy up mortgages and mortgage securities that are frozen because of massive losses linked to the US housing meltdown.
The initiative will contain two elements, one for pools of mortgages which banks can sell to investors; the second will be a fund directed by asset managers to allow public and private capital to buy distressed mortgage securities.
Mark Zandi, chief economist at Moody's Economy.com, said the plan "has a good chance of success" and appears better than the scheme outlined several weeks earlier.
"This plan relies much less on private investors and much more on direct government purchases of banks' troubled assets," Zandi said.
"Only a handful or so of private investors need to participate in this plan to establish workable auctions for the assets and thus determine a fair price for the assets."
Yet some analysts remained skeptical about whether these assets can be priced and sold under current market conditions, and whether banks holding them would be willing to sell at a deep discount, forcing a loss to be recognised.
The purchase of these assets was the original purpose of the 700-billion-dollar Troubled Asset Relief Programme passed by Congress last year, but which backed away from this idea.
Andrew Busch at BMO Capital Markets said that "no one is sure whether banks will sell these assets to create the programme. Other than that, the markets are loving it early."
The Dow Jones industrials surged 6.8 percent on the news amid a broad global stock market rally.
To allow banks to sell loans, the Federal Deposit Insurance Corp. will conduct an analysis to determine the amount of funding it is willing to guarantee. Investors will be able to bid on these, with financing available with a leverage ratio of up to 6-to-1.
For mortgage securities, the Treasury will approve up to five asset managers to handle these sales.
To reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the programme. Treasury funds will be invested one-for-one on a side-by-side basis with investors.
Robert Brusca at FAO Economics said the Treasury is "providing low interest loans for a fund with an eight percent private capital stake matched by the government."
He said the government gets half the capital and half the funds gain "but it puts up 92 percent of the money," with investors "getting the same sweet deal as a home owner putting eight percent down and the ability to walk away unscathed if it does not work." - AFP/ir/de
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