-
Source: Reuters -
Watch Video
-
Related
US Treasury chief Timothy Geithner has unveiled a new bank rescue plan that would put $US2 trillion to work mopping up bad assets and restoring credit, but stock markets plunged on fears it would not work.
Global markets had intensely awaited Geithner's ideas for a plan mixing private and public funding to stabilise a financial system tottering under the weight of bad mortgages, but were disappointed over the scant detail he provided.
The Dow Jones industrial average closed down more than 380 points or 4.6% in its biggest one-day percentage drop since December 1, while prices for US government bonds climbed as investors sought safety. The KBW index of bank stocks fell almost 14%.
The currency also came off a little with the risk sentiment. At 8:10am NZT the NZD-USD was trading down 0.0179 to .5229.
Geithner said lack of public confidence in prior rescue efforts had made it all the more difficult to stop "a dangerous dynamic" in which a lack of credit undercuts the economy and leads to more weakness among banks, worsening the recession.
"This is very complicated to get it right," he said in an interview on Bloomberg Television. "We are going to try to get it right before we give the details so that we don't add further to uncertainty in these markets."
In a speech, on television and in Capitol Hill testimony, Geithner made his case for how the Obama administration plans to handle the roughly $350 billion left in a $700 billion financial bailout fund approved by Congress in October.
He studiously avoided saying whether the administration might
have to ask Congress for more money to fix the banks, restore
credit and counter recession, but did not rule it out.
"We're going to consult with the Congress carefully to try to make
sure the world understands that the resources necessary to solve
this will be available over time," Geithner told CNBC, adding:
"The important thing is that...we send a basic signal, working with the Congress, that we will do what's necessary to fix this."
Market participants, however, were frustrated. "Investors want clarity, simplicity and resolution. This plan is seen as convoluted, obfuscating and clouded," said James Ellman, president of Seacliff Capital in San Francisco.
Leveraging private money
A centerpiece of the renamed "Financial Stability Plan" is a proposal to set up a public-private investment fund, in partnership with the Federal Deposit Insurance Corp, a bank watchdog, and the Federal Reserve, the US central bank.
Seeded with public money, it would leverage up to $US500 billion - and possibly as much as $US1 trillion - so that toxic assets can be purged from a weakened banking system.
Geithner told an invited audience at the US Treasury that $US50 billion in federal rescue funds will be used to try to stem home foreclosures and soften the crushing impact of the deep housing crisis now afflicting the entire economy.
The plan would also expand a Fed programme aimed at expanding credit card, student, auto and small business lending.
The facility will grow from its current $US200-billion limit to up to $US1 trillion, thanks to a jump in Treasury funding to $US100 billion from $US20 billion. The lending programme would be extended to cover a range of mortgage-related assets.
The Treasury also said it would continue to pump capital into banks, as the former Bush administration did, but Geithner said there will be conditions attached to ensure the money is lent and that top executives heed restraints on their pay.
In return for the capital, the government would receive preferred shares in the banks that could convert to common stock.
Bank fix part of larger plan
Geithner said it was critically important to restore credit
flows in order for a separate $US800-billion-plus package of
tax-cut and government spending measures to lift the economy.
Shortly after Geithner announced the plan, the US Senate cleared an
$US838 billion stimulus plan, which needs to be reconciled with a
separate bill approved by the US House of Representatives.
The Treasury is tussling with the worst financial crisis since the Great Depression. Careless lending fueled a housing boom that has gone bust and dragged the US economy and much of the rest of the world into deep recession.
President Barack Obama said on Monday that cleaning up banks' balance sheets was a priority and didn't rule out the possibility that it will take more money than the $US700 billion Congress already has approved to complete the job.
"We don't know yet whether we're going to need additional money or how much additional money we'll need until we see how successful we are at restoring a level of confidence in the marketplace," Obama told a news conference.
