Treasury Secretary Timothy Geithner announced plans for a fresh round of injections of taxpayer funds into banks, an expanded Fed-led effort to spur consumer and small-business loans, and a “Public-Private Investment Fund” of at least $500 billion to address the toxic assets clogging banks’ balance sheets. Geithner’s plan has four key components:
Private capital
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Illiquid securities, mainly tied to mortgages, have spooked investors away from putting new money into banks and made lenders loath to extend new credit. Rather than borrow at the Fed’s target rate for overnight funds — now as low as zero percent — to lend, banks have instead parked a surplus of $793 billion of cash at the central bank itself.
“We have got to fix the financial system — if we do not deal with this, we will not get anything else done,” Christopher Whalen, managing director of Institutional Risk Analytics, a financial-services research company in Torrance, Calif., said in a Bloomberg Television interview.
“If banks cannot move mortgages off their books, then we have a problem. We will see credit availability much lower” than in past generations.
Restart market
Investors offered mixed signals about their appetite for participating in the effort.
“It will be a bad decision for a hedge fund to invest in these illiquid assets,” said Kenneth Windheim, chief investment officer of Strategic Fixed Income LLC in Arlington, which manages $1.7 billion in assets and invests with hedge funds.
“You’ll end up running into the same problems as the banks. The hedge fund industry is suffering as it is already.”
‘Energize’ investors
John Snow, a former treasury secretary who is now chairman of Cerberus Capital Management LP, said that guarantees “might energize the private sector to begin putting in capital.”
There are signs of a thaw in some markets. Companies sold $146 billion of bonds in the U.S. last month, the most since May, and even high-yield, high-risk junk debt had the best start to a year since 2001.
Cash crunch
Another option that officials and regulators considered was to set up a government-funded “bad bank” that would buy up the toxic debt. Sen. Charles Schumer, D-N.Y., said that would “very expensive,” costing as much as $4 trillion, and would risk setting values for the securities “so low that every other bank would go bankrupt.”
To help spark new credit, the Treasury plans to work with the Federal Reserve to expand the Term Asset-Backed Securities Loan Facility. The program, which has yet to start in its original form, offers funding to investors in top-rated debt backed by “newly and recently originated” loans.
The TALF had initially aimed at providing up to $200 billion of credit, with $20 billion from the Treasury’s $700 billion Troubled Assets Relief Program. It covers education, car and credit card loans, and borrowing guaranteed by the Small Business Administration. The program may be expanded to as much as $1 trillion and include real estate debt such as commercial mortgage-backed loans.
“They’re going to have to put a lot more TARP money into that,” Gramley said.
