Shares jump on US toxic asset plan

Shares jump on US toxic asset plan

By Krishna Guha and Edward Luce in Washington and Francesco Guerrera, Julie MacIntosh and Michael Mackenzie in New York

Big-name investors on Monday warmly endorsed the Obama administration’s plan for public-private partnerships to deal with toxic assets in the financial system and stocks rallied after Tim Geithner, the US Treasury Secretary, detailed the proposals.

Bill Gross, chairman of Pimco, the bond fund manager, said: “This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate.”

Larry Fink, chairman of BlackRock, the asset management company, said his company would also take part. “I think it is a very important step that the government is assisting private capital and creating new demand for these troubled assets.”

Investors appeared particularly enthused by the prospect that the government would arrange financing for the joint ventures on generous terms.

By late afternoon in New York the S&P 500 was up 6.0 per cent, aided by positive news on home sales, with the index on course to close above 800 for the first time since mid-February.

The positive response from the markets – coupled with an absence of criticism from Congress – contrasted sharply with the sharply negative reaction when Mr Geithner sketched out his broad strategy a month ago.

Key points

●$75bn-$100bn from Tarp invested with private equity in a public-private fund worth $500bn

●Investors and public-private funds buy bad loans from banks at auction, with loans guaranteed by FDIC

●Five fund managers approved by Treasury to invest private capital and public-private fund equity in toxic securities

●The Fed’s Talf programme expanded to include toxic securities, including residential mortgage-backed securities

The only criticism came from economists such as Paul Krugman, the Princeton professor and New York Times columnist, who said the non-recourse government loans would allow the private partners to make large profits if the bets went well, while suffering only limited losses if the bets soured.

Political analysts said the embattled Mr Geithner had won himself a reprieve and regained some control of the economic debate, which had been dominated by political rage over bonuses at AIG, the crippled insurance group. But Mr Geithner remains the lightning rod on Capitol Hill for the perceived failure of the administration to control behaviour at financial institutions.

He said on Monday he understood the public rage, but added that the government had to work with the private sector to fix the financial system.

“This will make it easier for banks to raise capital privately because they will have a cleaner balance sheet,” he said. The government will allocate a total of $75bn to $100bn to the partnerships, which will be leveraged up with loan financing from the Federal Deposit Insurance Corporation and the Federal Reserve.

There will be two separate schemes – one targeting toxic credit securities, and the other targeting portfolios of loans. Under the legacy securities plan, the government will authorise up to five investment managers to raise equity and provide a dollar of equity and a dollar of debt for every private dollar raised.

The Fed will also offer loans to refinance toxic securities – as opposed to new credit securities – for the first time. Banks, which have taken billions of dollars of writedowns, said the plan’s structure was favourable to them as it gave them the last word on whether to sell their toxic assets.