As a possible harbinger of better times to come, U.S. financial markets rose more than 5 percent as the days final hour of trading to place after the Treasury Department's declared their new plan that will allow banks to remove toxic assets from their account statements. The New York Times explains that: "The Obama administration formally presented the latest step in its financial rescue package on Monday, an attempt to draw private investors into partnership with a new federal entity that could eventually buy up to $1 trillion in troubled assets that are weighing down banks and clogging up the credit markets."
President Obama and Treasury Secretary Geithner announced the "Public Private Investment Plan" earlier today in which: "the government and private investors," according to the Washington Post "will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks. The government will use up to $100 billion from the Troubled Assets Relief Program, matched by private funds, to capitalize the purchases.
The Washington Post explains: "The hope is that instead of hoarding cash in case those assets continue to lose value, banks will resume lending money once the toxic assets are off their books.
"The government and private investors, meanwhile, will hold the assets for the long term, and stand to either make or lose money depending on how the economy does."
The New York Times reiterates: "The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well. At least two Republican senators have called for his resignation. And on Sunday, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, told Fox News that “if he keeps going down this road, I think that he won’t last long.”
The core of the new plan will consist of $75 billion to $100 billion in funds provided by TARP, the Troubled Assets Relief Program which will allow the Public-Private Investment Program will supply about $500 billion to purchase the toxic assets with the government hoping that the monies available will eventually rise to nearly a trillion dollars that will be available to buy troubled assets.
The Financial Services Roundtable, an important financial services lobby, endorsed the Treasury’s plans on Monday morning, "saying that the purchase program would keep the troubled assets from bogging down big banks and preventing a recovery in banking and the broader financial system. Many experts say the financial system must recover before the country can claw its way out of the broad and painful recession.
Steve Bartlett, president of the Financial Services Roundtable remarked: “The partnership between public and private institutions is a great way to help restore liquidity in the market,.. “It is encouraging to see Treasury creating unique ways of stimulating the economy while protecting the taxpayer.”
It seems the greatest hindrance to the new plan is the number of banks and private investors who will become involved, and if Wall Street investors maintain their support for the plan.
One investor, the head equity trader at BNY ConvergEx Group, Anthony Conroy said: “People are excited that there’s a plan, that there’s a definitive plan.”
Other investors such as Matthew Eads, portfolio manager and securities analyst for Atlanta-based Eads & Heald Investment Counsel. felt unrestrained in voicing their opinions: "The market's really trading more on psychology now than fundamentals,... "Investors are really looking for anything to grab on that's a sign of good news."
Weighing in with his opinion President Obama, following his economic briefing stated: "We believe that this is one more element that is going to be absolutely critical in getting credit flowing again," Obama said. "It's not going to happen overnight. There's still great fragility in the financial systems, but we think that we are moving in the right direction.
"And we are very confident that," Obama continued, "in coordination with the Federal Reserve and the FDIC, other relevant institutions, that we are going to be able to not only start unlocking these credit markets, but we're also going to be in position to design the regulatory authorities that are necessary to prevent this kind of systemic crisis from happening again."
In essence the plan works in this manner: "according to a Treasury Department fact sheet: Imagine that a bank wants to sell mortgage loans with a $100 million face value. The FDIC would auction the loans to private bidders. Suppose the winning bidder offered $84 million. The private investor would put up $6 million, Treasury would put up $6 million, and the FDIC would guarantee $72 million worth of loans.
"If investors select assets wisely," The Washington Post explains, "and the assets prove to have good value over the long run, the loans will be repaid, and the hedge fund and Treasury Department split the remaining profits in proportion to their original investment. If the investors choose poorly, or the assets fall significantly in value, the government shares in the initial loss and potentially is required to spend additional money to cover the loan guarantees.
"The idea is to get those assets off the books of banks and onto the books of long-term investors who could lose money without causing broader economic damage."
It is important to note that Treasury officials intend to use their plan to gather momentum that will solve the ongoing breakdown in America's financial system.
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