Wall Street warms to ‘toxic assets’ plan
Geithner's plan aims to use public and private money to clean up $500 billion to $1 trillion in bad loans.
More than six months after the financial crisis began, the US government has a detailed plan that strikes at the heart of the overarching problem with the economy: “toxic assets” sitting on banks’ books.Skip to next paragraph
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The government’s latest effort to try to help the troubled financial system involves setting up a mechanism by which the taxpayers and private investors buy those bad assets. The effort, announced on Monday by Treasury Secretary Timothy Geithner, transfers part of the risk to America’s taxpayers and the federal bank insurance system. It’s not clear how much money the government will ultimately need to commit to remove between $500 billion and $1 trillion in loans from the banks’ books.
But without the program, which quickly attracted interest on Wall Street, “the risk would be greater headwinds for the economy and deeper recession,” says Mr. Geithner.
While the Bush and Obama administrations had moved quickly since September to shore up banks in imminent danger of collapse, these “toxic assets” have remained on the books because the banks have been unwilling to sell them at deeply discounted prices. The Obama administration says it’s important to allow the banks to have the freedom to lend money and help get the economy moving again if the problem is to be solved.
Bounce in the markets
Geithner’s new program has been widely anticipated. On Feb. 10, he had announced a less specific bank bailout plan. A disappointed Wall Street sold off stocks, with the Dow Jones Industrial Average falling 382 points. By way of contrast, by Monday at midafternoon, the Dow had gained nearly 300 points.
Some large investors, such as Black Rock and PIMCO, issued statements to say they would become partners.
“This is perhaps the first win-win-win policy to be put on the table, and it should be welcomed enthusiastically,” said Bill Gross, PIMCO’s chief investment officer, in an interview with Reuters. “We intend to participate and do our part to serve clients as well as promote economic recovery.”
Some private economists also said the plan could work.
Bad assets of $1 trillion?
The Federal Reserve is now putting the banks through “stress tests” to determine how much additional capital they might need if the economy worsens. Bank analysts expect that the Fed, in the course of these examinations, will also get a better idea of the amount of bad loans in the banks’ portfolios. Mr. Zandi estimates the bad loans are now as much as $1 trillion.