US $1tn toxic asset plan gets thumbs up

America's plan to buy up to $1tn (£686bn) of toxic assets has gone down well. In theory.

Last Updated: 31 Aug 2010

The US Treasury today announced its ‘Public-Private Investment Programme', the Obama administration's mega-buck stab at restoring stability and confidence in its troubled economy. It has committed $75bn to $100bn from its Troubled Asset Relief Program (Tarp) to the scheme, to be used alongside private funds to buy up unsellable assets from its banks to get them lending again.

The plan, which will generate $500bn in purchasing power with the potential to expand to $1,000bn has gone done  very well on Wall Street, being hailed broadly as the best laid plan of any put forward so far. The Dow was up nearly 7% overnight. Just as well for Treasury secretary Tiim Geithner, for whom the clock was definitely ticking even though he has only been in his job a short while. 

The announcement marks the latest in a long line of acronym-based US fiscal plans, from Tarp to Talf - the $1tn term asset backed securities loan facility. Now it has P-Pip, which is going to be harder to turn into a snappy soundbite without giving its adherents an uncertain-sounding stutter.

PPIP is loaded with detail (previous US Treasury packages have been criticised for being too broad brush and insufficiently thought through), but the basic idea is that proviate investors will be given cheap,guaranteed Federal loans in order to buy up so-called 'toxic' assets from the banks. If all goes according to the master plan, this will achieve the double whammy of taking the toxic assets out o fthe banking system and putting a floor on their value so that they can be realistically traded once again.

If the scheme's basic assumption - that the problem with the banking system currently is one of liquidity - then it should stand a decent chance of making some positive difference. The banks themselves will certainly be relieved, not least because the involvement of private investors as middle men in the scheme should keep the politicians out ofthe banks boardrooms.

It may also help to generate  fairer prices for the asstes themselves, although this is the subject of some controversy. The most bearish of bears now think that these toxic assets are essentially worthless and should be written off as such. Making any kind of a price for them could thus be seen as simply putting off the final day of reckoning, and at great expense to the taxpayer. 

There're also a couple of other potential risks. Firstly that even low interest loans and the fact that the government will bear 93% of the risk won't encourage enough private investors to get involved. Secondly that bansk won't be prepared to sell at the price they are offered, preferring to hanf onto their dodgy assets rather than crystallise what will certainly be some pretty punisihingg losses on book value.

So it's a gamble, if a pretty well-thought out one. The UK Treasury will be watching what happpens now with a keen eye. The FTSE was up overnight but has now stalled at around 3900. Darling and co have taken a different tack, using taxpayers' money to insure Royal Bank of Scotland and Lloyds Banking Group against future losses on £600bn of poor loans and investments.

In the past when Geithner has opened his mouth it has been known to spark a selling frenzy. It looks today like he may have finally done something right.


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