US PRESIDENT Barack Obama’s administration has announced a sweeping overhaul of the government’s effort to rescue the banking system, promising to generate up to $2 trillion (€1.55 trillion) in public and private money to absorb toxic assets and get credit moving again.
Treasury secretary Timothy Geithner said the American public had lost confidence in a $700 billion bailout plan launched by the Bush administration and in the leaders of the country’s top financial institutions.
“To get credit flowing again, to restore confidence in our markets, and restore the faith of the American people, we are fundamentally reshaping the government’s programme to repair the financial system,” he said.
The new plan aims to stabilise the financial system by pumping capital into banks, helping to determine prices of toxic assets weighing on companies’ balance sheets and slowing the rate of home repossessions.
A joint public- and private-sector fund will buy as much as $1 trillion of illiquid assets, and another programme will supply up to $1 trillion in new credit to consumers and businesses.
New public investment in banks will come with tighter restrictions on dividend payments, acquisitions and executive pay.
“Instead of catalysing recovery, the financial system is working against recovery,” Mr Geithner said.
“At the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it.”
The New York stock exchange responded warily to the plan, with some investors complaining that it was inadequate and others pointing out that many of the details remained vague. The Dow Jones Industrial Average fell more than 300 points following the announcement, with financial stocks leading the downward plunge, and the Nasdaq and SP 500 indices also turned negative.
Toxic assets, mostly linked to mortgages, have frightened investors away from banks and made lenders reluctant to offer new loans.
The new government plan will provide up to $100 billion to support the Federal Reserve’s Term Asset-Backed Securities Loan Facility, which could make up to $1 trillion available to investors in securities backed by student, credit-card and car loans.
The central bank said yesterday that the programme could be expanded to include mortgage-backed securities.
Under the new Treasury plan, banks with insufficient capital will be given additional taxpayer funds in the form of convertible preferred securities, but dividends, stock buybacks, acquisitions, executive compensation and luxury spending will be limited.
Banks that accept public money will have to participate in efforts to mitigate home foreclosures and the Treasury and the Federal Reserve will work to reduce monthly payments and establish loan-modification guidelines for troubled homeowners.
Mr Geithner said yesterday that, despite the enormous headline cost of the financial bailout, much of the funding would take the form of loans and loan guarantees, reducing the risk to American taxpayers.
“But I want to be candid: this strategy will cost money, involve risk, and take time,” he said.
“As costly as this effort may be, we know that the cost of a complete collapse of our financial system would be incalculable for families, for businesses and for our nation.”
