By partnering with private investors, government hopes it can finally flush out toxic assets from banks' balance sheets.
ROAD TO RESCUE
* Stocks spike on bank plan
* Flying the dirt-cheap skies
* Bank stocks surge on 'bad-asset' plan
* Existing home sales spike 5%
* U.S. unveils 'bad asset' plan
Treasury Secretary Tim Geithner said the public-private partnership program was the best alternative for cleaning toxic assets from banks' balance sheets.
Road to Rescue
Economy rescue: Adding up the dollars
The government is engaged in an unprecedented - and expensive - effort to rescue the economy. Here are all the elements of the bailouts.more
chart_bad_assets.gif
WASHINGTON (CNNMoney.com) -- The Treasury Department unveiled its long-awaited plan to remove many of the troubled assets from banks' books Monday, representing one of the biggest efforts by the U.S. government so far aimed at tackling the ongoing financial crisis.
Under the new so-called "Public-Private Investment Program," taxpayer funds will be used to seed partnerships with private investors that will buy up toxic assets backed by mortgages and other loans.
The goal is to buy up at least $500 billion of existing assets and loans, such as subprime mortgages that are now in danger of default.
Treasury said the program could potentially expand to $1 trillion over time, but that the hope is that it would not only help cleanse the balance sheets of many of the nation's largest banks, which continue to suffer billions of dollars in losses, but help get credit flowing again.
The government will run auctions between the banks selling the assets and the investors buying them, hoping to effectively create a market for these assets.
To kickstart things, the administration said it will commit $75 billion to $100 billion and would consider how the program is progressing before committing more money.
Even as he acknowledged that the government was taking on risk with this new program, Treasury Secretary Tim Geithner defended it as the best alternative, saying that doing nothing would result in a deeper credit crunch and a "longer, deeper recession."
The plan, which was widely hinted at over the weekend, appeared to be warmly received by Wall Street. The Dow Jones industrial average gained almost 4% in late morning trading Monday, helped by a surge in the financials. Shares of Citigroup (C, Fortune 500) and Bank of America (BAC, Fortune 500) each climbed about 15% on the New York Stock Exchange.
Investors have been waiting expectantly for details since Geithner first announced the framework of a plan last month to address two of the biggest problems in the banking sector: the toxic assets keeping banks from lending and the shortage of capital at major institutions.
But the latest program may very well add to the cost of federal bailouts to date. So far, the government has spent $2.5 trillion of the more than $12 trillion authorized for programs aimed at propping up the nation's financial services industry and the broader U.S. economy.
Will the plan work?
One of the biggest difficulties in getting the program off the ground was how to price the soured assets. If the government paid too little, banks would take the hit. But if the government overpaid, then already-soaked taxpayers would feel the pinch.
One nagging concern, however, is whether the government's involvement will actually spur banks and private investor groups, such as hedge funds, pension plans and insurance companies to participate.
Administration officials indicated Sunday they had gotten support from private investors and banks who have been briefed about the program. But some analysts questioned whether the government's help would be enough to push investors and banks toward figuring out a price.
At the same time, there are fears that investors may be reluctant to participate in light of the fact that Congress has retroactively altered the terms of many of the government rescue programs so far.
Bill Gross, co-chief investment officer of Pimco, one of the world's largest bond investment managers, said those concerns were not enough to deter his firm's interest in the program.
He told CNN that Pimco planned to participate and would also apply to the Treasury for one of the available asset manager positions to help run the program. Asset manager BlackRock (BLK, Fortune 500) said it also planned to apply.
Monday, March 23, 2009
Wednesday, March 18, 2009
How to fail to recover - Economic Times - 18/03/09
The stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world too, for a strong global recovery requires a strong US economy, says Joseph E Stiglitz.
SOME PEOPLE thought that Barack Obama’s election would turn everything around for America. Because it has not, even after the passage of a huge stimulus bill, the presentation of a new programme to deal with the underlying housing problem, and several plans to stabilise the financial system, some are even beginning to blame Obama and his team.
Obama, however, inherited an economy in free fall, and could not possibly have turned things around in the short time since his inauguration. President Bush seemed like a deer caught in the headlights — paralysed, unable to do almost anything — for months before he left office. It is a relief that the US finally has a President who can act, and what he has been doing will make a big difference.
Unfortunately, what he is doing is not enough. The stimulus package appears big — more than 2% of GDP per year — but one-third of it goes to tax cuts. And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries), and falling asset prices, they are likely to save much of the tax cut.
Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. America’s 50 states must maintain balanced budgets. The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger — indeed, California alone faces a shortfall of $40 billion.
Household savings are finally beginning to rise, which is good for the long-run health of household finances, but disastrous for economic growth. Meanwhile, investment and exports are plummeting as well. America’s automatic stabilisers — the progressivity of our tax systems, the strength of our welfare system — have been greatly weakened, but they will provide some stimulus, as the expected fiscal deficit soars to 10% of GDP.
In short, the stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy.
The real failings in the Obama recovery programme, however, lie not in the stimulus package but in its efforts to revive financial markets. America’s failures provide important lessons to countries around the world, which are or will be facing increasing problems with their banks:
• Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim.
• Governments do not like to admit the full costs of the problem, so they give the banking system just enough to survive, but not enough to return it to health.
• Confidence is important, but it must rest on sound fundamentals. Policies must not be based on the fiction that good loans were made, and that the business acumen of financial market leaders and regulators will be validated once confidence is restored.
• Bankers can be expected to act in their self-interest on the basis of incentives. Perverse incentives fuelled excessive risktaking, and banks that are near collapse but are too big to fail will engage in even more of it. Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends.
• Socialising losses while privatising gains is more worrisome than the consequences of nationalising banks. American taxpayers are getting an increasingly bad deal. In the first round of cash infusions, they got about $0.67 in assets for every dollar they gave (though the assets were almost surely overvalued, and quickly fell in value). But in the recent cash infusions, it is estimated that Americans are getting $0.25, or less, for every dollar.
Bad terms mean a large national debt in the future. One reason we may be getting bad terms is that if we got fair value for our money, we would by now be the dominant shareholder in at least one of the major banks.
• Don’t confuse saving bankers and shareholders with saving banks. America could have saved its banks, but let the shareholders go, for far less than it has spent.
• Trickle-down economics almost never works. Throwing money at banks hasn’t helped homeowners: foreclosures continue to increase. Letting AIG fail might have hurt some systemically important institutions, but dealing with that would have been better than to gamble upwards of $150 billion and hope that some of it might stick where it is important.
• Lack of transparency got the US financial system into this trouble. Lack of transparency will not get it out. The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks’ bad assets. But this will not establish “market prices,” as the administration claims. With the government bearing losses, these are distorted prices. Bank losses have already occurred, and their gains must now come at taxpayers’ expense. Bringing in hedge funds as third parties will simply increase the cost.
• Better to be forward looking than backward looking, focusing on reducing the risk of new loans and ensuring that funds create new lending capacity, than backward looking. Bygone are bygones. As a point of reference, $700 billion provided to a new bank, leveraged 10 to 1, could have financed $7 trillion of new loans.
The era of believing that something can be created out of nothing should be over. Short-sighted responses by politicians — who hope to get by with a deal that is small enough to please taxpayers and large enough to please the banks — will only prolong the problem. An impasse is looming. More money will be needed, but Americans are in no mood to provide it — certainly not on the terms that have been seen so far. The well of money may be running dry, and so, too, may be America’s legendary optimism and hope.
(The author, professor of economics at
Columbia University, is recipient of
the 2001 Nobel Prize in Economics)
(C): Project Syndicate, 2009
SOME PEOPLE thought that Barack Obama’s election would turn everything around for America. Because it has not, even after the passage of a huge stimulus bill, the presentation of a new programme to deal with the underlying housing problem, and several plans to stabilise the financial system, some are even beginning to blame Obama and his team.
Obama, however, inherited an economy in free fall, and could not possibly have turned things around in the short time since his inauguration. President Bush seemed like a deer caught in the headlights — paralysed, unable to do almost anything — for months before he left office. It is a relief that the US finally has a President who can act, and what he has been doing will make a big difference.
Unfortunately, what he is doing is not enough. The stimulus package appears big — more than 2% of GDP per year — but one-third of it goes to tax cuts. And, with Americans facing a debt overhang, rapidly increasing unemployment (and the worst unemployment compensation system among major industrial countries), and falling asset prices, they are likely to save much of the tax cut.
Almost half of the stimulus simply offsets the contractionary effect of cutbacks at the state level. America’s 50 states must maintain balanced budgets. The total shortfalls were estimated at $150 billion a few months ago; now the number must be much larger — indeed, California alone faces a shortfall of $40 billion.
Household savings are finally beginning to rise, which is good for the long-run health of household finances, but disastrous for economic growth. Meanwhile, investment and exports are plummeting as well. America’s automatic stabilisers — the progressivity of our tax systems, the strength of our welfare system — have been greatly weakened, but they will provide some stimulus, as the expected fiscal deficit soars to 10% of GDP.
In short, the stimulus will strengthen America’s economy, but it is probably not enough to restore robust growth. This is bad news for the rest of the world, too, for a strong global recovery requires a strong American economy.
The real failings in the Obama recovery programme, however, lie not in the stimulus package but in its efforts to revive financial markets. America’s failures provide important lessons to countries around the world, which are or will be facing increasing problems with their banks:
• Delaying bank restructuring is costly, in terms of both the eventual bailout costs and the damage to the overall economy in the interim.
• Governments do not like to admit the full costs of the problem, so they give the banking system just enough to survive, but not enough to return it to health.
• Confidence is important, but it must rest on sound fundamentals. Policies must not be based on the fiction that good loans were made, and that the business acumen of financial market leaders and regulators will be validated once confidence is restored.
• Bankers can be expected to act in their self-interest on the basis of incentives. Perverse incentives fuelled excessive risktaking, and banks that are near collapse but are too big to fail will engage in even more of it. Knowing that the government will pick up the pieces if necessary, they will postpone resolving mortgages and pay out billions in bonuses and dividends.
• Socialising losses while privatising gains is more worrisome than the consequences of nationalising banks. American taxpayers are getting an increasingly bad deal. In the first round of cash infusions, they got about $0.67 in assets for every dollar they gave (though the assets were almost surely overvalued, and quickly fell in value). But in the recent cash infusions, it is estimated that Americans are getting $0.25, or less, for every dollar.
Bad terms mean a large national debt in the future. One reason we may be getting bad terms is that if we got fair value for our money, we would by now be the dominant shareholder in at least one of the major banks.
• Don’t confuse saving bankers and shareholders with saving banks. America could have saved its banks, but let the shareholders go, for far less than it has spent.
• Trickle-down economics almost never works. Throwing money at banks hasn’t helped homeowners: foreclosures continue to increase. Letting AIG fail might have hurt some systemically important institutions, but dealing with that would have been better than to gamble upwards of $150 billion and hope that some of it might stick where it is important.
• Lack of transparency got the US financial system into this trouble. Lack of transparency will not get it out. The Obama administration is promising to pick up losses to persuade hedge funds and other private investors to buy out banks’ bad assets. But this will not establish “market prices,” as the administration claims. With the government bearing losses, these are distorted prices. Bank losses have already occurred, and their gains must now come at taxpayers’ expense. Bringing in hedge funds as third parties will simply increase the cost.
• Better to be forward looking than backward looking, focusing on reducing the risk of new loans and ensuring that funds create new lending capacity, than backward looking. Bygone are bygones. As a point of reference, $700 billion provided to a new bank, leveraged 10 to 1, could have financed $7 trillion of new loans.
The era of believing that something can be created out of nothing should be over. Short-sighted responses by politicians — who hope to get by with a deal that is small enough to please taxpayers and large enough to please the banks — will only prolong the problem. An impasse is looming. More money will be needed, but Americans are in no mood to provide it — certainly not on the terms that have been seen so far. The well of money may be running dry, and so, too, may be America’s legendary optimism and hope.
(The author, professor of economics at
Columbia University, is recipient of
the 2001 Nobel Prize in Economics)
(C): Project Syndicate, 2009
Subscribe to:
Posts (Atom)