A big gamble from the Obama administration to expand the old $US700 billion rescue of the US financial system by trying to relieve financial groups of troubled assets by using a combination of a public/private partnership.
And compared with the first bank bailout plan on February 10, the new, ambitious ideas laid out overnight seems to have worked with Wall Street surging by nearly 500 points on the Dow (almost 7%) and over 7% for the Standard & Poor’s 500 Index.
The S&P 500 is now up 18% from the 12 year low hit low on March 9.
It was the biggest rise since November 21.
US interest rates edged a touch higher, oil surged past $US53 a barrel, a three month high, copper topped the $US4,000 a tonne mark, gold and silver fell, the Us dollar weakened, the Australian dollar rose over 70 US cents for the first time in months.
Bank shares were boosted, as were the stocks of other financial companies as some of the biggest private equity and professional investors in the US were revealed as participating in the new plan.
Our market and bank shares look as though they will also rise strongly today.
But there’s an irony here: for the new plan to work the way it should and start providing certainty to the markets, lenders and borrowers, the Obama Administration has to work with many of the people blamed for some of the excesses of the credit bubble, and use some of their techniques of leverage, special investment structures and suspend financial belief until values settle down.
US Treasury Secretary Tim Geithner is under enormous pressure to get this proposal right, and the first reaction is a thumbs up, which will go some way to starting to ease some of the current uncertainty.
Overnight Mr Geithner revealed the Public Private Investment Program using up to $US100 billion of bailout money to attract investment funds to purchase — and banks to unload — the illiquid toxic securities and loans that no one wants and which have caused credit to dry up.
The US Treasury, Federal Reserve and the Federal Deposit Insurance Corp, the country’s main bank regulator, will all play a role alongside private investors in aiming to buy between $US500 billion and $US1 trillion of troubled assets.
“By providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets,” Geithner said in an op-ed piece published in the Wall Street Journal on Monday.
Mr Geithner wrote in the Journal piece:
"Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity.
"The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets.
"The funds established under this program will …use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. …private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets. …
"The new …Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time… Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets"..
“The ability to sell assets to this fund will make it easier for banks to raise private capital.”
The announcement is a major test for Geithner, whose first speech on the financial rescue on February 10 offered so few details that it triggered a sell-off in financial stocks.
Adding to the pressure has been the wave of populist anger over the rescue thus far, following the revelation that employees of American International Group got $US165 million in bonuses after the insurer received taxpayer funds, after executives at other groups (Merrill Lynch) got $US4 billion in bonuses after being taken over by Bank of America, with the help of US taxpayer cash..
The New York Times reported that three chiefs of investment firms said in interviews that they were impressed with the terms of the program — which would have the government lend nearly 95% of the money for any investment — but remained reluctant to participate because of the potential for future regulation.
“Despite this reluctance The Times said Laurence Fink, chief executive of BlackRock, said his firm (One of the biggest funds managers in the US) planned to participate in the program.
“We will be raising money on behalf of our clients,” he was quoted as saying, adding that he was not worried about government intervening in his business. “I don’t see how Congress can interfere in this.”
Pimco, a large bond fund, also was expected to participate. Pimco is based on the West Coast and is owned by the huge Allianz insurance group of Germany. It has been managing other debt deals for the Us Treasury.
Pimco and Blackrock later confirmed their participation: both are among the biggest investors on Wall Street in shares (Blackrock) and in bonds (Pimco).
Dealers said one of the big stumbling locks will be valuing on dodgy mortgage-related assets that have not been traded for months.
The government hopes that the support it will be offering to investors will be so much that they will be willing to risk overpaying somewhat for the assets.
Geithner will also announce plans later this week to ask Cong
