Tuesday February 10, 08:23 PM
Geithner unveils new rescue plan for US finance sector
By Rob Lever
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WASHINGTON (AFP) - US Treasury Secretary Timothy Geithner unveiled a stepped-up program Tuesday to stabilize the financial system including an initial fund of 500 billion dollars to absorb toxic assets.
The includes a public-private partnership aimed at soaking up toxic assets clogging the financial system. It also involves new efforts to boost consumer lending, limit home foreclosures and provide new capital for banks.
Geithner said the plan would "bring the full force of the United States government to bear to strengthen our financial system so that we get the economy back on track."
The much-anticipated announcement represented President Barack Obama's plans for the second portion of the 700-billion-dollar Troubled Asset Relief Program approved last year by Congress.
Financial markets saw wild gyrations after the announcement. Stock markets went into a freefall, and Treasury bonds rallied as investors sought a safe haven from market turmoil.
"Markets do not initially like Geithner's comments," said David Kotok at Cumberland Advisors.
"He gave only sketchy details that would help clarify the program. His speech was purposefully vague. Markets and the country want clarity, transparency and reliability. Instead, they got promises it would be forthcoming but they did not get facts and details that would substantiate it."
The Dow Jones Industrial Average fell as much as 4.2 percent in afternoon trade, accelerating an early decline.
"We hate to be pessimistic right out of the chute, but what this comprehensive plan really entails is a promise to further work details out," said Jon Ogg, analyst at 24/7 Wall Street.
"This does sound as though the institutions that can't really be saved will not be."
The American Bankers Association meanwhile lauded the plan. ABA president Edward Yingling called it "a comprehensive, yet flexible plan that can restore confidence in the markets. We are pleased they took the time to address the stress in the financial markets in a coordinated way."
A key element of the new initiative will be a public-private investment fund started with 500 billion dollars "with the potential to expand up to one trillion dollars," to help cleanse the banking system of toxic real estate assets.
This will function as an aggregator bank, or "bad bank," to help financial institutions value their mortgage securities and clear their balance sheets of risky bets on a US housing bubble.
Another element will be additional capital injections into banks, which would be placed in a so-called Financial Stability Trust.
"The capital will come with conditions to help ensure that every dollar of assistance is used to generate a level of lending greater than what would have been possible in the absence of government support," Geithner said.
Additionally, the Treasury and Federal Reserve will expand a program to boost lending for mortgages and other consumer and business loans to up to one trillion dollars.
The US central bank, in coordination with a Treasury Department effort to steady the financial system, said it was preparing "a substantial expansion" of a program announced last year but not yet implemented to get more credit flowing.
"This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again," Geithner said.
The Fed would pump up the amount to one trillion dollars from the previously announced 800 billion for its Term Asset-Backed Securities Loan Facility, which would accept mortgage-backed securities and securities backed by auto loans, credit card loans, student loans, and some small business loans.
The expansion "would be supported by the provision by the Treasury of additional funds from the Troubled Asset Relief Program," the Fed said.
The new effort also commits 50 billion dollars to prevent "avoidable foreclosures" of owner-occupied homes by helping to reduce monthly payments for middle-class families.
"Many of these families borrowed beyond their means. But many others fell victim to terrible lending practices that left them exposed, overextended, and with no way to refinance," Geithner said.
"On top of that, homeowners around the country are seeing the value of their homes fall because of forces they did not create and cannot control."
Geithner said Obama had ordered "a comprehensive plan to address the housing crisis" that would be announced "in the next few weeks."
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