- The Washington Times - Wednesday, February 11, 2009

UPDATED:

The Obama administration unveiled its long-awaited bank rescue plan Tuesday but it did not spell out how it would resolve the most critical issue on Wall Street — how to dispose of unsellable debts — and provoked widespread disappointment that sent the Dow Jones Industrial Average plummeting nearly 400 points.

The goal of the program was to dramatically widen aid for banks and credit markets, using $300 billion from the Treasury’s remaining bank bailout funds to try to leverage as much as $2 trillion in funding from private markets and the Federal Reserve as the way to return the financial system to health.

But the most critical element of the plan — to create a fund that would purchase and dispose of trillions of dollars of souring loans on bank books using a combination of federal and private funds — was offered in only two vague paragraphs that gave little hint as to how the program would work and provoked massive skepticism and doubt on Wall Street.

Major stock indexes lost more than 4 percent of their value, the Dow fell below 8,000 to end at 7,888.88, and bank stocks that were supposed to be helped by the plan plummeted by 14 percent on average in the worst market drubbing since the day President Obama took office.

“This was not ready for prime time. Someone miscalculated,” said Bernard Baumohl, chief global economist at the Economic Outlook Group.

“Wall Street was expecting a specific plan, and we didn’t get it … There were no specifics, such as guarantees from the government that those toxic assets will not fall to a lower value.”

“Through weeks of build-up to the Tuesday announcement, the administration had led not only Wall Street but many in Congress and on Main Street to believe it would offer a comprehensive and credible plan to solve the bad loan problem.

“This is the most important program of all, and it’s surprising that they haven’t gotten their act together,” Mr. Baumohl added.

Treasury Secretary Timothy Geithner said the department is still reviewing a “range of options” to leverage an estimated $200 billion or less of uncommitted bailout funds through a mechanism that would take potentially trillions of dollars of bad loans off bank books.

But many Wall Street executives are hard put to understand how such a program would work, since private investors to date have been unwilling to pay anything more than pennies on the dollar for such loans.

Confronted with Wall Street’s bad reaction, Mr. Geithner told Bloomberg News: “This is very complicated to get it right … We are going to try to get it right before we give the details so that we don’t add further to uncertainty in these markets.”

President Obama later in an ABC “Nightline” interview accused Wall Street executives of creating the problem and then sitting back and expecting the government to solve it for them.

“Wall Street, I think, is hoping for an easy out on this thing and there is no easy out,” he said.

Besides leaving details of the so-called “bad bank” program to the imagination, the Treasury announcement also did not detail how it would use $50 billion of the bailout funds to limit home foreclosures, although the administration had broadcast widely in advance that it would take several more days to complete that plan.

The most concrete program the Treasury offered Tuesday was to use $100 billion of the bailout funds to greatly expand the Fed’s efforts to revive collapsed securities markets for consumer and business loans. The fed would leverage the Treasury funds to purchase as much as $1 trillion of securitized loans under a program first established by the Bush administration. And the program would be expanded to include for the first time commercial real estate loans to try to avert a developing crisis in that area.

The plan also stepped up help for small businesses, which would receive more generous terms and beefed up assistance on loans guaranteed by the Small Business Administration.

The Treasury Department Tuesday morning dramatically widened its program for aiding banks and credit markets, using $300 billion from its bank bailout fund to try to leverage as much as $2 trillion in funding from private markets and the Federal Reserve to return the financial system to health.

The program greatly expands the Fed’s effort to revive collapsed securities markets for consumer and business loans, using $100 of bailout funds to expand the Fed’s purchase of securitized loans and extend the program to address a developing crisis in commercial real estate finance. Small businesses would receive more generous terms and beefed up assistance on loans guaranteed by the Small Business Administration.

The Treasury said it will subject all banks to a rigorous stress tests to determine their health, in a process that is expected to accelerate the closure of many small banks while providing the Treasury the information it needs to comprehensively address toxic loan problems at money-center banks that it has deemed too big to fail.

To absorb some of the trillions of dollars of bad loans banks are holding, which has been jeopardizing their health, the Treasury sketched out a plan to set up a “bad bank” fund that would be seeded with money from the bailout fund but supplemented with money from private banks and buyers who would invest in the assets. Details of that critical and controversial program will be hashed out in coming weeks.

“Without credit, economies cannot grow at their potential, and right now, critical parts of our financial system are damaged,” said Mr. Geithner in a speech unveiling the plan. He conceded that much of the plan is experimental and the administration will have to try new tacks and possibly ask Congress for more money if it does not succeed at reviving the banking system and credit markets. Mr. Geithner pleaded with the public and Congress to understand that by helping banks and credit markets, the Treasury is doing what’s necessary to promote a recovery from deep recession that will help to restore 3.6 million jobs that have been lost in the last year.

“Instead of catalyzing recovery, the financial system is working against recovery. And at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it.”

Whether the program ends up costing more than the $350 billion Congress has already provided depends on whether the expanded efforts succeed at reviving collapsed credit markets and arresting further deterioration at critical national banks, which face another year of record defaults and loan losses in 2009.

The stock market reacted negatively when the plan was announced, with the Dow Jones Industrial Average falling close to 300 points, suggesting that many investors on Wall Street doubt that the proposed public-private partnership will work to finally cure banks of their souring loan problems.

It is those problems that have not only dragged down banks and caused some major institutions to fail, but have fed the more than 40 percent drop in major stock indexes since the fall.

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