US to woo investors with toxic asset plan

The United States on Monday offered generous financing for private investors to help cleanse banks of up to $1-trillion in toxic assets that are blocking lending and worsening a deep US recession.

After disappointing markets last month with a bare outline of proposed public-private partnerships, the stakes are high for Treasury Secretary Timothy Geithner as he seeks to convince investors he has a viable plan to get credit flowing again.

Initially, Treasury will tip in $75-billion to $100-billion to launch the partnerships, taking the money from the $700-billion financial rescue fund Congress approved in October.

The government money would be put alongside private capital and then leveraged up to $500-billion, or possibly double that amount, with the help of the Federal Deposit Insurance Corp, a US bank regulator, and the Federal Reserve.

Geithner, writing in Monday’s Wall Street Journal, said it was necessary to do something to clean up the banking sector and restore lending.

“Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience,” he said, referring to a decade of economic stagnation in Japan in the 1990s.

Under the programme Geithner has crafted, the government will provide the lion’s share of the funding to buy up soured assets to encourage private investors to participate.

Many investors are concerned at the anger that has been leveled at Wall Street by lawmakers who are seeking to claw back bonuses from companies rescued with public funds.

“Most investors are going to take a wait-and-see attitude,” said Andrew Orchard, equities analyst for the Royal Bank of Scotland.

However, one of the world’s largest asset managers, BlackRock expressed interest.

“It is definitely our intention to get involved as one of the investment managers in this programme,” Curtis Arledge, managing director and co-head of US fixed income at money management firm BlackRock, told Reuters.

One part of the plan would see Treasury provide from 50% to 80% of the equity capital needed to set up a fund, and the FDIC would lend the partnership up to six times the amount of its combined capital.

Another part aimed at taking mortgage-related securities off bank books would let up to five investment managers put up money, with the government matching it dollar-for-dollar and then providing debt equal to half of the combined fund.

By having the managers compete, an Obama administration official said a market could be created for securities that do not currently trade.

To help clear old mortgage debt off bank books, the Federal Reserve would broaden the financing it provides under its new Term Asset-Backed Securities Loan Facility, or TALF.

The TALF, now a $200-billion programme, will be bumped up to $1 trillion and will begin accepting older residential mortgage-backed securities that were once rated Triple-A, as well as commercial mortgage-backed securities and asset-backed securities that are Triple-A, as collateral for loans.

An official said no congressional approval was needed to launch the programme and indicated that investors would not face tough new executive-pay restrictions, even though Treasury was mindful of lawmakers’ anger over executive bonuses at companies that have received government bailouts. - Reuters

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