US stocks surge as gov't unveils $1tn toxic debt plan

WALL STREET: US Government toxic debt plan fires up investors. (Getty Images)

US stock prices surged on Monday as the Obama administration unveiled an incentives-filled plan to help the banking system rid itself of $1 trillion dollars of toxic debt.

The US Treasury said it will launch the program with $75 billion to $100 billion from existing financial rescue funds with the aim of thawing the frozen market for mortgage-backed securities and other hard-to-sell assets.

President Barack Obama said the plan was critical to a US economic recovery, but added, "We still have a long way to go and we have a lot of work to do."

One aim of the plan is to get a market mechanism working to restart markets for securities not currently trading and, in the process, reduce investor fears that some form of bank nationalisation might have to be considered in the future.

As well as initial financing from the Treasury and private investors, US banking regulator, the Federal Deposit Insurance Corp (FDIC), as well as the Federal Reserve, will be tapped to offer further financing.

Under one element of the plan - focusing on bad loans - the Treasury will provide up to 80 percent of initial capital alongside investment by private funds. The FDIC would then offer debt financing for up to six times the pooled amount.

Another part of the plan - this one aimed at addressing the problem of toxic securities - will see the Federal Reserve’s $200 billion Term Asset-Backed Securities Loan Facility, or TALF, ramped up to $1 trillion. The programme will then begin accepting older mortgage-related and other securities as loan collateral.

In addition, the Treasury will approve up to five investment managers and match their money one-for-one. It will then offer debt financing for 50 percent of the combined capital pool to buy securities banks want to unload.

Meanwhile, US Treasury Secretary Tim Geithner – in a move aimed at encouraging investor participation – said private partners participating in the plan will not be subject to the tough executive pay restrictions on bonuses applying to recipients of government bailouts.

Analysts cautioned, however, that the plan’s success will depend on whether banks are prepared to sell assets cheaply or want to wait in the hope they can get a better price when the economy eventually recovers.

Others, including Nobel Prize-winning economist and New York Times columnist Paul Krugman said the plan is nothing more than a variation of a ‘cash-for-trash’ proposal floated by the Bush administration last autumn. Incentives meant that investors could profit if asset values rise but walk away if they happen to fall.

Republican politicians meanwhile expressed concern over the rich incentives offered by the government, which could end up providing more than 90 percent of the funds to buy the assets.

Print | Email | Discuss this article

| Share |

READERS' COMMENTS

Click here to post a comment

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic. Arabian Business would like to point out that only comments relevant to the story will be published. Any containing personal insults or inappropriate language will not be approved.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Enter the words above *
Please click post only once - your comment will not be published immediately.

MORE FROM ARABIANBUSINESS.COM