23 Mar 2009, David Benyon, Operational Risk & Regulation
WASHINGTON, DC - Treasury secretary Tim Geithner will today unveil US plans to tempt private investors into buying illiquid assets gumming up US banks' balance sheets and keeping credit markets frozen.
The Obama administration will announce the new Public Private Investment Program, designed to get credit markets moving by using up to $100 billion of bailout funds to encourage the sale of illiquid loans and securities from banks to investment funds.
The US Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) will all be involved in the scheme to spur investors to buy between $500 billion and $1 trillion of troubled assets.
"By providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks and reduce uncertainty about the scale of losses on bank balance sheets," said Geithner in a Wall Street Journal opinion piece. "The ability to sell assets to this fund will make it easier for banks to raise private capital."
Geithner's gamble comes after his first speech on the financial rescue on February 10 was so sparse in detail that it sparked increased selling of financial stocks in markets lacking confidence.
Pressure has since mounted with news that AIG would award $165 billion in bonuses after receiving $170 billion in federal funds. Last week, the House of Representatives voted to pass a 90% tax on AIG bonuses.
Later this week, Geither will unveil plans to ask Congress to allow the Treasury and Federal Reserve pre-emptive powers over failing banks before they collapse.
The new rules would allow the government to limit payments to creditors, break contracts on executive remuneration, and give debt guarantees for companies requiring bailouts.