STOCK MARKETS around the world rallied yesterday as investors welcomed the latest step in the Obama administration’s effort to rescue the financial system and make credit more easily available to businesses and consumers.
Treasury secretary Timothy Geithner said the US government would work with private investors, such as hedge funds and pension funds, to buy hundreds of billions of dollars in toxic assets held by banks and other financial institutions. Under the scheme, the government will match up to $100 billion of private capital to generate $500 billion in purchasing power but Mr Geithner said it could double in size later.
“This will help banks clean up their balance sheets and make it easier for them to raise private capital,” the treasury secretary said.
“We have to complement this programme with a range of approaches to help get these securities markets back to a point where they’re working again.”
Citigroup and Bank of America led a rally in bank shares on Wall Street following the announcement of the plan, which the White House hopes will unclog the balance sheets of financial institutions of toxic loans and mortgage-backed securities they have been unable to value or sell.
Mr Geithner said the scheme was the best way to unfreeze the assets and get credit flowing again, adding that alternatives – such as leaving the frozen assets on bank balance sheets or having the government buy them directly – would put too much risk on taxpayers. “I am very confident this scheme dominates all the alternatives for trying to find that balance.”
Under the treasury scheme, private investors would assume very little risk, with the government taking 93 per cent of the risk, either through direct investment or guaranteed loans to the private sector partners.
Wall Street also drew confidence yesterday from an unexpected jump of more than 5 per cent in the number of homes sold in February, although US property prices continue to fall and are now 28 per cent lower than at their peak in July 2006.
President Barack Obama said yesterday that the plan to buy up toxic assets from banks is part of a multi-pronged strategy to revive the economy.
“Because of the work that’s already been done, you are starting to see glimmers of hope in the housing market that stabilisation may be taking place. Mortgage rates are at a very, very low level, and you’re starting to see some activity in the housing market,” he said.
“We then took a series of steps to improve liquidity in what had been secondary markets that had been completely frozen. And we are now seeing activity in student loans and auto loans.”
Mr Obama said that the plan to help banks to unload some of their bad assets meant that taxpayers would only pay what market participants believed the assets are worth and the public finances would benefit if the value of the assets appreciated.
“We believe that this is one more element that is going to be absolutely critical in getting credit flowing again,” he said.
The White House said yesterday that private investors had already shown “considerable” interest in participating in the new scheme. Potential investors have received assurances that they will not be subject to limits on executive pay and bonuses imposed on companies that receive government bailout funds.
Mr Obama has sought to distance himself in recent days from a measure passed by the House of Representatives that would tax at 90 per cent big bonuses paid by insurance giant AIG to senior staff after the firm accepted tens of billions of dollars in bailout funds.
The president told 60 Minutes on CBS that, while he was angry about the bonuses, he was uncomfortable with using the tax system to target a small group of people.“Let’s see if there are ways of doing this that are both legal, that are constitutional, that uphold our basic principles of fairness, but don’t hamper us from getting the banking system back on track,” he said.