Washington: The US Treasury will detail on Monday its plan to purge banks of toxic assets with the help of private investors, a key part of Washington’s drive to pull the world’s biggest economy out of severe recession.
The scheme to rid banks’ balance sheets of up to $1 trillion of bad loans and securities that thwart lending is central to President Barack Obama’s effort to revive the economy with stimulus spending, a financial sector clean-up and regulatory reform.
Treasury Secretary Timothy Geithner, due to brief on the toxic assets plan at 8:45am, said in an interview with the Wall Street Journal that private sector participation was essential to the scheme’s success.
“We don’t want the government to assume all the risk. We want the private sector to work with us.”
The plan includes incentives in the form of abundant loans and generous terms to entice private investors to buy the unwanted assets, a source familiar with the matter told Reuters.
The news sent US stock futures and Asian share markets higher on Monday. Currencies that were sold off heavily during bouts of market volatility, such as the Australian dollar or sterling, also rose.
The euro climbed to a five-month high against the yen after European Central Bank President Jean-Claude Trichet said euro zone rates were already low and the ECB might turn to unconventional measures to get credit flowing again.
“There are a number of drawbacks associated with policy rates deliberately put at a zero level by the decision of the central banks. That’s the reason we do not think it would be appropriate,” Trichet told the Wall Street Journal in an interview published on Monday.
The US Treasury’s plan comes at a crunch time for Obama, who prepares to meet fellow leaders of the world’s top 20 economies at a financial summit in London on 2 April and struggles to contain public anger over big bonuses paid by insurer AIG that has been bailed out with $180 billion in taxpayer money.
The new White House team is also trying to win support for big-ticket items in Obama’s record $3.5 trillion budget proposal for the 2010 fiscal year - something in very short supply among Republicans in Congress.
Much is at stake in the US financial clean-up for the world economy, mired in its deepest slump since the 1930s Great Depression, and with many nations, particularly in Asia, relying on US recovery to kick-start their export-dependent economies.
Obama’s team was “incredibly confident” the economy will start growing again this year, Christina Romer, head of the White House Council of Economic Advisers, said on Sunday.
Obama offered a word of caution, warning the U.S. financial system still faced risks requiring government intervention to avoid a more destructive recession.
“There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them,” Obama said in an interview with the CBS program “60 Minutes” aired on Sunday.
“And if all those financial institutions fail at the same time, then you could see an even more destructive recession and potentially depression.”
When Geithner first mentioned the plan to use public-private investment funds in February, markets were disappointed at the lack of details. On Monday, hopes that the Treasury will present a clear-cut plan to deal with the aftermath of a housing boom, encouraged investors.
The Treasury’s plan is to include setting up an entity to be used by the Federal Deposit Insurance Corp, the main US banking regulator, to offer low-interest loans to private interests for buying up banks’ soured assets, a source told Reuters on Saturday.
Treasury will also hire investment managers to run the public-private funds to invest for potential profit in troubled mortgages, with government capital matching private capital contributions, according to the source.
Finally, the Federal Reserve will expand its new consumer loan-focused $1 trillion Term Asset-Backed Securities Loan Facility to buy so-called “legacy” assets, the source said.
Still, Geithner’s plan may prove a hard sell with Obama’s vast spending envisioned to reboot the economy and US banks facing stiff resistance from some lawmakers and corporate boardrooms to what they see as a shift to a “big government” philosophy.