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US to buy up $1tn in toxic assets US to buy up $1tn in toxic assets
(20 minutes later)
The US has announced details of a plan to buy up to $1 trillion (£686bn) worth of toxic assets to help repair banks' balance sheets.The US has announced details of a plan to buy up to $1 trillion (£686bn) worth of toxic assets to help repair banks' balance sheets.
The "Public-Private Investment Programme" will purchase the troubled mortgages and securities that have been at the root of the credit crisis.The "Public-Private Investment Programme" will purchase the troubled mortgages and securities that have been at the root of the credit crisis.
The Treasury has committed $75bn to $100bn to the programme and said the private sector would also contribute.The Treasury has committed $75bn to $100bn to the programme and said the private sector would also contribute.
Investors welcomed the news, with stocks rising in Europe and Asia.Investors welcomed the news, with stocks rising in Europe and Asia.
The Treasury said the plan would help the financial system recover.The Treasury said the plan would help the financial system recover.
"This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly," the Treasury said."This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly," the Treasury said.
This should mean that banks become less anxious Robert Peston, BBC business editor Read Robert's blog This should mean that banks become less anxious Robert Peston, BBC business editor Read Robert's blog class="" href="/1/hi/business/7959248.stm">Q&A: How the latest plan will work
"Simply hoping for banks to work legacy assets off over time risks prolonging the financial crisis," it added."Simply hoping for banks to work legacy assets off over time risks prolonging the financial crisis," it added.
The $75bn to $100bn will come from the Treasury's $700bn Troubled Asset Relief Program (Tarp), which has already been approved by Congress.The $75bn to $100bn will come from the Treasury's $700bn Troubled Asset Relief Program (Tarp), which has already been approved by Congress.
Low-interest loans will also be offered to private investors via the Federal Reserve to encourage them to take part in the scheme.Low-interest loans will also be offered to private investors via the Federal Reserve to encourage them to take part in the scheme.
It said that the money will initially provide the "purchasing power" for $500bn of toxic assets, with the potential to expand up to $1 trillion.It said that the money will initially provide the "purchasing power" for $500bn of toxic assets, with the potential to expand up to $1 trillion.
"Over time, by providing a market for these assets that does not now exist, this programme will help improve assets values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets," US Treasury Secretary Timothy Geithner wrote in the Wall Street Journal before the programme was officially announced."Over time, by providing a market for these assets that does not now exist, this programme will help improve assets values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets," US Treasury Secretary Timothy Geithner wrote in the Wall Street Journal before the programme was officially announced.
Alternative approachAlternative approach
Mr Geithner added that the plan was needed because the US financial system as a whole was "still working against recovery" and "many banks, still burdened by bad lending decisions, are holding back on providing credit". TOXIC DEBTS/ASSETS Loans that are very unlikely to be recovered from borrowersToxic debt describes a whole package of loans where it is now unlikely that it will be repaidLoans are regarded as a bank's assets Financial jargon explainedTimeline: US government bail-outs class="" href="/1/hi/business/7959248.stm">Q&A: How the latest plan will work HOW ASSETS BECAME TOXIC Banks own large amount of US mortgages or complex financial instruments (securities) based on US mortgagesDue to the bursting of US housing bubble in 2007, many of the loans are very unlikely to be paid back by borrowersInvestors desperately try to sell-off mortgages and mortgage-backed securitiesBut as prices decline and investors realise the risk, potential buyers disappear, causing the market for these assets to seize upWider impact: Banks stop lending to each other because their assets are worth less so they can't afford to do deals, and because the lack of clarity about value of these assets causes crisis of confidenceGovernment plan aims to kick-start the market for these mortgage-related assets and get the wider financial system working Financial jargon explainedTimeline: US government bail-outs
He said that encouraging the private sector to take part would be better for the taxpayer as the risks of purchasing toxic assets would be shared. Mr Geithner added that the plan was needed because the US financial system as a whole was "still working against recovery" and "many banks, still burdened by bad lending decisions, are holding back on providing credit".He said that encouraging the private sector to take part would be better for the taxpayer as the risks of purchasing toxic assets would be shared.
BBC business editor Robert Peston said the aim of the plan is to remove as many bad assets as possible from banks' balance sheets.BBC business editor Robert Peston said the aim of the plan is to remove as many bad assets as possible from banks' balance sheets.
This should mean that banks become less anxious about future write-offs and become more confident that they have the capital resources to re-start lending.This should mean that banks become less anxious about future write-offs and become more confident that they have the capital resources to re-start lending.
It is an alternative approach to that taken by the UK Treasury, which has used taxpayer's money to insure Royal Bank of Scotland and Lloyds Banking Group against future losses on some £600bn of poor loans and investments, he added.It is an alternative approach to that taken by the UK Treasury, which has used taxpayer's money to insure Royal Bank of Scotland and Lloyds Banking Group against future losses on some £600bn of poor loans and investments, he added.
Stocks riseStocks rise
The markets have been eagerly awaiting the details of the US plan to tackle bank's toxic assets, which have been seen as a drag on world recovery.The markets have been eagerly awaiting the details of the US plan to tackle bank's toxic assets, which have been seen as a drag on world recovery.
Stocks rose worldwide on hopes that the plan would go some way to cleaning up the world financial system. The FTSE 100 of leading UK shares was up 1.1%, or 42.31 points, at 3885.16.Stocks rose worldwide on hopes that the plan would go some way to cleaning up the world financial system. The FTSE 100 of leading UK shares was up 1.1%, or 42.31 points, at 3885.16.
The price of crude oil also hit its highest in almost four months at close to $53 a barrel on optimism the plan would help the US climb out of recession.The price of crude oil also hit its highest in almost four months at close to $53 a barrel on optimism the plan would help the US climb out of recession.
The plan was originally announced in February, shortly after Mr Geithner took up his post as Treasury Secretary but details were scant on how it would work.The plan was originally announced in February, shortly after Mr Geithner took up his post as Treasury Secretary but details were scant on how it would work.
The Bush administration abandoned its earlier plans to buy up toxic assets in October 2008, and decided instead to use funds from the Tarp programme to take stakes in banks.The Bush administration abandoned its earlier plans to buy up toxic assets in October 2008, and decided instead to use funds from the Tarp programme to take stakes in banks.
The US administration has been under pressure to bring forward its plans for the bank rescue before the G20 summit takes place in London in April, and G20 finance ministers urged action by the US at their meeting in Horsham last week.The US administration has been under pressure to bring forward its plans for the bank rescue before the G20 summit takes place in London in April, and G20 finance ministers urged action by the US at their meeting in Horsham last week.
Over the weekend, administration officials dismissed fears that private investors would be reluctant to participate in the rescue plan because of the fall-out over the bonuses issues.Over the weekend, administration officials dismissed fears that private investors would be reluctant to participate in the rescue plan because of the fall-out over the bonuses issues.
Austan Goolsbee, a member of the Council of Economic Advisors, said that such investors "would be treated totally differently than companies like AIG or Fannie Mae, where they are only in business because the government saved them".Austan Goolsbee, a member of the Council of Economic Advisors, said that such investors "would be treated totally differently than companies like AIG or Fannie Mae, where they are only in business because the government saved them".