Geithner Reveals Asset Buyback Plan, Market Rallies
U.S. Treasury Secretary Timothy Geithner this week revealed details of his plan to get toxic assets — primarily Collateralized Mortgage Obligations — off the books of American banks, freeing up capital so the banks can resume lending. The stock market reacted positively to the news.
Under the plan, private investors will put up as little as 6% in capital to purchase equity, a number which suprised some observers as quite low. But Geithner, discussing the plan on Monday morning , dismissed those worries by stressing that private investors would be on the hook before taxpayers. “Their entire capital will be at risk, that’s the important thing,” he said.
If there are gains, however, the government will benefit as well, Geithner said. “If there’s a return over time, which we expect there will be, taxpayers will share in that return.”
The Geithner plan has broadened somewhat since he first announced in early February that the Treasury intended to join with hedge funds, private equity firms, and other investors in public-private partnerships to buy up the bad assets weighing down banks. Following that speech, investors and others on Wall Street heavily criticized Geithner for providing only vague details as to how the partnerships would work. The stock market immediately tanked, with the Dow Jones industrial average finishing down 4.6% that day.
Wary of a repeat of that performance, Geithner and other officials issued a flurry of detail on Monday. Officials said the plan would rely on three principles: maximizing the impact of each taxpayer dollar, shared risks and profits with private-sector participants, and private sector price discovery for the “legacy” assets.
“This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly,” Treasury said in a briefing paper. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases—along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.”
The program will leverage funds using a maximum six to one debt to equity ratio. Officials said by using $75 to $100 billion in capital from the Troubled Asset Relief Program (TARP) and capital from private investors, the plan will generate $500 billion in purchasing power to buy the troubled assets. The program could be expanded to purchase up to $1 trillion in troubled assets.
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