The $1 trillion plan that will absorb toxic assets
"This plan should allievate banks balance sheets and help ease access to credit for consumers and business to get the economy moving again"
Toronto (Bederwanaag) March 23, 2009 – The Obama Administration unveiled its plan on how it will rescue the banking system and to get credit flowing again. This is an attempt by the Treasury Department to buy up all the toxic assets that are still hurting banks balance sheets.
To free up the lending, the government will create a new body, the Public-Private Investment Program. The program which would use $75 billion to $100 billion in taxpayer dollars, plus money from private investors, to generate $500 billion to buy so-called toxic assets from troubled banks. That amount could increase to $1 trillion over time. It is suppose to attract private investors with low-cost loans by the Federal Deposit Insurance Corporation (FDIC) and the U.S. Federal Reserve, with the government shouldering most of the risk.
This new incentive is designed along with the release the next day of the government’s broad framework for overhauling the financial system, in order to prevent a similar crisis to occur again. An important part of this regulatory framework is to give the authority to the government to intervene and take over financial institutions when signs of trouble arise, which would pose a serious threat to the financial system as is currently happening.
According to the Associated Press, “Government officials believe that this new power will save taxpayers money and avoid the type of controversy that erupted last week when insurance giant AIG Inc. Paid employees of its troubled financial products unit $218 million in bonuses even though it received more than $170 billion in government aid”
These new powers give the Treasury Secretary the authority to take control of a firm only with an agreement and through co-ordination with the U.S. Federal Reserve.
It is yet unknown whether or not this program would bring stability to the financial system in the long-term and many economists say that many of these investors are still unsure whether the government has the financial resources necessary to make this plan work and also if the private sector would be motivated to participate in this program.
But, after Treasury Secretary Tim Geithner’s announcement today the stock market was quite upbeat and ends today with a positive momentum on all major world markets, continuing the two week rally on the major stock markets. The announcement was also welcomed by the many on Wall Street. Richard Baker, CEO of the hedge fund trading group the Managed Fund Association, welcomed the announcement. “We share Secretary Geithner’s commitment to promote efforts that will stabilize our financial markets and strengthen our nation’s economy.”
A very important step was taken today by the Obama Administration to help bring stability to the financial markets and to get banks to ease access to credit for consumers and business. With the government absorbing all these toxic assets it could then alleviate banks balance sheets and to help turn the corner in restoring confidence in the global economy.
Kassim Wais
Deputy Editor of Bederwanaag News Online
Toronto, Canada
waisk@yorku.ca
