Washington: US Treasury chief Timothy Geithner on Tuesday unveiled a new bank rescue plan that would put $2 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 stabilize a financial system tottering under the weight of bad mortgages, but were disappointed over the scant details provided.
The Dow Jones industrial average ended down 4.6% - its biggest one-day percentage drop since 1 December - with bank stocks hit particularly hard. US government bonds rose as investors scrambled for safe-haven debt.
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.
Geithner said the 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.
He steered clear of 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.”
The lack of details frustrated many market participants.
Leveraging private money
Geithner defended his decision to put forward what he called a framework instead of waiting until a detailed proposal was ready.
“If we wait and we take the approach that we don’t lay that out, ever, until we’ve solved every problem and every detail, then I think that itself will create greater uncertainty,” he said, acknowledging he was “very sensitive” to criticism about the approach.
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.
Seeded with public money, it would leverage up to $500 billion - and possibly as much as $1 trillion - so that toxic assets can be purged from a weakened banking system.
Geithner told an invited audience at the US Treasury that $50 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 program aimed at expanding credit card, student, auto and small business lending. The facility will grow from its current $200 billion limit to up to $1 trillion, thanks to a jump in Treasury funding to $100 billion from $20 billion.
The lending program would be extended to cover some 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 $800-billion-plus package of tax cuts and government spending measures to lift the economy.
Shortly after Geithner announced the plan, the US Senate cleared an $838 billion stimulus package, 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 as careless lending fueled a housing boom gone bust, dragging the US economy - and much of the rest of the world - into a deep recession.
President Barack Obama said on Monday that cleaning up banks’ balance sheets was a priority and did not rule out the possibility that it will take more money than the $700 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.