My comment: This is the long awaited news on second bank bail-out. Basically this plan means that US government will get worthless loans (mostly mortgage but we should expect that it will acquire credit card defaults, commercial paper in default, etc.) from banks and will give one trillion US treasuries in exchange. Then, the Fed will buy those treasuries (and even bad loans too) giving fresh US dollars in exchange. Formally, treasuries are safe assets therefore the Fed´s balance sheet does not show losses in this deal.
>From the American householder perspective it means that every American (every child, every elder, etc.) will have to pay around $30,000 in taxes or in inflation. Disregarding who acquires treasuries formally (foreign or domestic investors). Does it fix the problem? No. Temporarily it washes bank books and it let bankers escape from courts for their potential fraud once they created and sold derivatives based on "safe" assets that in fact were just bad paper. Will it allow credit to recover and to spread again as years ago? No. The problem is not into the banking system, it is into the real economy. Only and plainly when fixing the real economy will the problem be fixed. But I will develop this topic in another message. Bonus outrage, Madoff, Stanford, etc., although justify outrage, are just minor topics compared to this. Peace and best wishes. Xi Geithner Relies on Investors for $1 Trillion Plan http://www.bloomberg.com/apps/news?pid=20601087&sid=afEEj0f7zVuU&refer=home March 23 (Bloomberg) -- The Obama administration unveiled its long- awaited plan to remove toxic assets from the books of the country’s banks, betting that it can revive the U.S. financial system without resorting to outright nationalization. The plan is aimed at financing as much as $1 trillion in purchases of devalued real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. The Public-Private Investment Program will also rely on Federal Reserve and Federal Deposit Insurance Corp. debt guarantees, the Treasury said in a statement in Washington. Today’s effort is the latest in a string of government attempts to end the worst financial crisis in seven decades; the Bush administration abandoned an earlier attempt to buy the toxic securities in November. It may take months before it’s clear whether Geithner’s approach will work, because officials still have to pick private asset managers and banks have yet to commit to selling their illiquid investments. “The big question is what is the incentive for the banks to sell?” said Dino Kos, managing director at Portales Partners LLC in New York and former executive vice president at the New York Fed. “What is the incentive for a hedge fund to pay a price close to where the banks have it marked at?” Stock Reaction Today’s announcement provides details on an initial strategy laid out by Geithner last month, which caused a slump in stocks because it lacked an explanation of how the effort would work. The Standard & Poor’s 500 Stock Index rose 2.4 percent to 787.04 at 9:43 a.m. in New York. The index is still down about 10 percent since Geithner’s Feb. 10 outline of the Obama administration’s plans. Yields on benchmark 10-year Treasury notes were little changed at 2.61 percent. Austan Goolsbee, a member of the White House Council of Economic Advisers, said in an interview with Bloomberg Television that “you will start to see this buying up the assets” shortly after private asset managers are chosen by May. “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 statement said. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience.” ‘Legacy Loans’ Half of the Treasury’s funds will go to a “Legacy Loans Program” that will be overseen by the FDIC. The Treasury would provide half of the capital going to purchase a pool of loans from banks, with private fund managers putting up the rest. The FDIC will then guarantee financing for the investors, up to a maximum of six times the capital, or equity, provided. The FDIC, which has extensive experience disposing of devalued loans from taking over failed banks, will hold auctions for the pools of loans, which will be controlled and managed by the private investors with oversight by the FDIC. A “broad array of investors are expected to participate in the Legacy Loans Program,” the Treasury said, encouraging insurance companies, pension funds and even individual investors to join in. The second half of the Treasury’s contribution will go to the “Legacy Securities Program.” The objective of the initiative is to generate prices for securities backed by mortgages that are no longer traded because investors have little confidence about the underlying value of the home loans. Fed Role Under this program, the Fed will expand an existing facility that provides financing for investor purchases of asset-backed securities. The Term Asset-Backed Securities Loan Program will be broadened to take on assets such as residential and commercial mortgage-backed securities that were originally rated AAA and sold by private banks. The Treasury will also approve as many as five asset managers “with a demonstrated track record of purchasing legacy assets” that will buy the securities. The managers will be given time to raise private capital and receive matching funds from the Treasury. They will also be able to get “senior debt” from the Treasury of 50 percent to as much as 100 percent of the fund’s capital. Adding to the pressure on the administration is an unprecedented wave of populist anger over the rescue thus far, following the revelation that employees of American International Group Inc. got $165 million in bonuses after the insurer received taxpayer funds. Bonus Outrage On March 19, the House voted 328-93 to impose a 90 percent tax on employee bonuses paid by companies such as AIG and Fannie Mae that received more than $5 billion in taxpayer assistance. The Senate is considering similar legislation. The backlash on Capitol Hill means private firms may think twice about taking part in Geithner’s public-private partnership, even though government financing will limit their risk and increase the potential of earning profits, David Kotok, chairman and chief investment officer of Cumberland Advisors Inc., in Vineland, New Jersey, said before today’s release. Goolsbee expressed confidence that private investors will step up. “The private sector will compete to be partners with the government,” Goolsbee predicted. “I don’t believe they should expect to be treated the same way as a deadbeat type of institution like AIG or Fannie Mae. Those couple of businesses are only in existence because the government has bailed them out.” --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "World-thread" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/world-thread?hl=en -~----------~----~----~----~------~----~------~--~---
