U.S. lays out plan to attract buyers for toxic debt

The U.S. Treasury Department on Monday rolled out detailed plans for persuading private investors to help rid banks of up to $1 trillion in toxic assets that are seen as a roadblock to economic recovery.

• Generous government financing will underpin the so-called Public-Private Investment Program, which Treasury will kick off with $75-$100 billion that comes from its existing $700-billion bailout fund approved by Congress last fall.
• The plan is being launched in a volatile environment, with lawmakers still steaming over big bonus payments made to American International Group employees when it was getting government handouts. Treasury specified that investors in its latest effort to revive credit markets will not face tough executive pay restrictions.
• Initial market reaction to the plan, which had been leaked over the weekend, was favourable overseas and signs pointed to a strong U.S. stock market opening in contrast to the disappointment registered after Geithner offered only a scanty outline of the plan on February 10.
• While Treasury, in company with private investors, will put up initial financing, the Federal Deposit Insurance Corp. will guarantee debt financing issued by the investment funds that will fund asset purchases.
• A third component will have the Federal Reserve widen the financing it now provides under its new Term Asset-Backed Securities Loan Facility, or TALF. That $200 billion program, will be bumped up to $1 trillion and will begin accepting older residential mortgage-backed securities that were once rated Triple-A, as well as commercial mortgage-backed securities and asset-backed securities that are Triple-A, as loan collateral.
• Treasury is aiming for an early start for the program.
• It will initially hire five, and possibly more, investment managers who can demonstrate that they can raise up to $500 million in private funds to buy securities. Bids for those spots are due April 10, with winners to be notified by May 1.
• Geithner, who already has faced calls for his resignation, faces a high bar in trying to persuade lawmakers, disgruntled taxpayers, and potential investors that his plan can succeed in getting credit flowing again.
• “If the U.S. authorities actually succeed in buying up to $1 trillion of ‘toxic assets’, it would be considered a significant step,” said Mamoru Yamazaki, chief economist with RBS Securities in Tokyo.
• “However, the markets will be disappointed if the programs do not move forward due to problems regarding how the asset value is measured.”
• Treasury said the FDIC will offer financing at up to a 6-to-1 leverage ratio and Treasury will provide up to 50 percent of the equity capital that the funds will need to get started.
• In a Wall Street Journal editorial on Monday, Geithner said the government had to step in to clean up the banking sector in order to get normal lending flowing once more.
• “Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience,” he said, referring to a decade of economic stagnation in Japan in the 1990s.