U.S. to Help Investors Buy Bank Assets
Stocks Soar 7% in Response to Plan Aiming to Shore Up Lenders' Books
Tuesday, March 24, 2009
Financial markets roared ahead yesterday as investors reacted with near-euphoria to the Obama administration's new trillion-dollar plan to stabilize banks by relieving them of their troubled assets and risky loans.
But even as markets exulted, conflicting interests among the program's participants -- banks, investors and taxpayers -- were emerging, leaving in doubt the fate of a program meant to revive bank lending and in turn reinvigorate the overall economy.
Some banks are resisting government pressure to sell assets at prices they believe to be too low. And despite the risk of an outcry from Congress, the Treasury this weekend made the program more attractive to private investors, according to industry and some government officials. Treasury officials said the last-minute changes were not intended to sweeten the deal.
In the short run, the rollout of the plan gave a much-needed boost to the administration and beleaguered Treasury Secretary Timothy F. Geithner, as officials on Wall Street and Washington in general spoke favorably of the plan. The Standard & Poor's 500-stock index rose 7.1 percent in the best day for the stock market in five months.
"The policymakers definitely have the right ideas in their head right now, but whether they can execute it I don't know," said Daniel Alpert, managing director of Westwood Capital, a boutique investment bank.
The new Public-Private Investment Program, which Geithner announced yesterday, includes programs to buy up real-estate-related loans and securities backed by those loans. It will combine $75 billion to $100 billion in financial rescue funds already approved by Congress with investments from private investors, loan guarantees by the Federal Deposit Insurance Corp., and loans from the Federal Reserve to buy up to $1 trillion in real-estate-related assets.
The idea is that banks are unwilling to lend money in part because they fear further losses on past loans now stuck on their books. Government officials said they hope that introducing new buyers will help set a floor for asset prices and stabilize the broader financial system by removing troubled assets from financial firms.
But the initiative leaves the Treasury's financial rescue fund nearly tapped out, and with a hostile environment in Congress, administration officials are worried that they might be unable to get more money.
If the Treasury uses the full $100 billion, it would leave only $12 billion uncommitted from the $700 billion financial rescue package that Congress approved in early October, according to tabulations by the Committee for a Responsible Federal Budget. In turn, that would leave Geithner with few options to provide emergency capital if a major financial firm finds itself on the verge of failure or the "stress tests" now being conducted on large banks reveal an urgent need.
Geithner's credibility with Congress was at a low ebb after the outcry last week over bonuses paid to executives of American International Group. Congressional leaders still say it would be difficult to pass a law giving the Treasury any further funds for financial rescues.
Yet without those funds, the Treasury was forced to stretch the dollars it already has, crafting a plan that is complex and probably more costly to taxpayers over the long term than if Congress provided help.
Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, suggested that a successful rollout of the public-private investment fund could change the tenor on Capitol Hill. "What they're trying to do now is avoid a showdown" between the administration and Congress over more bailout money. "If these things are successful, then I think there would be some more funding down the road."