NEW YORK (Reuters) - Treasury Secretary Timothy Geithner on Tuesday unveiled a plan to rescue a financial sector whose losses already exceed $1 trillion, but doubts about its effectiveness lingered.
The package relies heavily on an effort to attract private capital by providing government guarantees for sharply devalued securities tied to mortgages and other consumer loans. Other such attempts made to date have failed.
“For all the rhetoric that this is a new plan, they’ve done nothing but rehash and expand the old procedures,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.
Investors also complained about a lack of clarity. “They still don’t have anything very specific nailed down,” said Carl Lantz, interest rate strategist at Credit Suisse.
Financial markets reacted with disappointment, with the Dow Jones industrial average sliding over 2.4 percent to session lows.
Below are some of the details of the Geithner plan, along with some possible pitfalls.
PUBLIC AND PRIVATE PARTNERSHIP
This is a new twist on the old “bad bank” idea. Already facing a record budget deficit of at least $1 trillion, the White House is trying to avoid committing too much more taxpayer cash to the rescue. With that in mind, it will seek to attract private money through a combination of government money and guarantees against losses. The Public-Private Investment Fund would be launched at $500 billion, but should ultimately provide up to $1 trillion in financing capacity, the Treasury said. Still, details on how exactly Uncle Sam would entice private investors to buy distressed assets remained sketchy. Investors say the U.S. government may find buyout firms, hedge funds and other private investors reluctant to help it cleanse banks of toxic assets.
PUMPING UP ASSET-BACKED BONDS
The Fed is vastly expanding its Term Asset-Backed Securities Loan Facility, known as TALF, to $1 trillion from $200 billion. This measure is essentially aimed at reviving securitization, the process by which bonds backed by consumer loans are sold in the secondary market, creating more liquidity. Critics worry, however, that this method has already been proven too opaque to withstand shocks and that these efforts might fall short. They also note that consumer demand is at its weakest in more than a half century, suggesting the availability of credit may not lead to actual spending. “We have agreed to expand this program to target the markets for small business lending, student loans, consumer and auto finance, and commercial mortgages,” Geithner said.
FENCING OFF FORECLOSURES
Details were scant on the mortgage front, with Geithner simply saying the Treasury would commit an additional $50 billion to foreclosure prevention. Geithner said foreclosure relief would be aimed at owner-occupied middle-class homes, and that Treasury would announce a more comprehensive plan in the next two weeks. Treasury also reiterated the Federal Reserve’s commitment to buying up mortgage and agency debt of fallen government-sponsored enterprises Fannie Mae and Freddie Mac as a way to bring mortgage rates down. This has thus far proven a losing battle as selling in U.S. Treasury bonds has pushed up the long-term interest rates on which mortgage costs are pegged.
Additional reporting by Burton Frierson
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