DJIA 7972 -297 VIX 46.96 Gold 915.10 +22.30 OIL 39.06 -.47 DOLLAR INDEX 85.70
The US Treasury Department unveiled a revamped financial rescue plan to cleanse up to $500 billion in spoiled assets from banks' books and support $1 trillion in new lending through an expanded Federal Reserve program.
The renamed "Financial Stability Plan," rolled out by Treasury Secretary Timothy Geithner at the Treasury, will also devote $50 billion in federal rescue funds to try to stem home foreclosures and soften the crushing impact of the deep housing crisis now afflicting the entire economy.
Stocks Tank In Reaction
The Treasury said a public-private investment fund will be established, seeded with government money, to leverage private capital so that so-called toxic assets can be sponged out of the faltering banking system.
The hope is that that will enable banks to resume lending.
Geithner acknowledged that deep skepticism has developed over the fairness and efficiency of a $700 billion bank bailout program approved by Congress in October.
He said leaders of some financial institutions that have received money had squandered the good faith that is needed to make the bank rescue effective.
"The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust," Geithner said.
"I want to be candid: this comprehensive strategy will cost money, involve risk, and take time," Geithner said in a widely anticipated speech. "We will have to adapt it as conditions change. We will have to try things we've never tried before. We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted."
After Geithner's announcement, stock prices fell further and the dollar extended losses while prices for U.S. Treasury debt securities extended gains.
James Ellman, President of Seacliff Capital in San Francisco, said: "Investors want clarity, simplicity, and resolution. This plan is seen as convoluted, obfuscating, and clouded."
Geithner acknowledged deep skepticism has developed over the fairness and efficiency of a $700-billion bank bailout program approved by Congress in October. He said leaders of some financial institutions that have received money had squandered the good faith that is needed to make the bank rescue effective.
"The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust," Geithner said.
The revamped approach to the government's financial rescue war chest would use $100 billion to cover risks the Fed would take in expanding a $200 billion program supporting consumer and small business lending to a $1 trillion program that also supports an array of mortgage-related assets.
Markets appeared caught off balance by some of the measures that Geithner offered.
"Just a day ago, they were talking about good bank and bad bank. Now they come up with something completely new," said Robert Brusca, chief economist for Fact and Opinion Economics in New York. "I'm not sure how this public/private thing will work."
President Obama told a news conference on Monday that cleaning up banks' balance sheets was a priority and didn't rule out the possibility that it will take more money than the $700 billion Congress already has approved to complete the job.
"We don't know yet whether we're going to need additional money or how much additional money we'll need until we see how successful we are at restoring a level of confidence in the marketplace," Obama said.
The financial-rescue plan contains a number of measures meant to ease the credit crunch, including a public-private initiative to take bad assets off of banks' balance sheets, mortgage loan and foreclosure relief and a new consumer lending initiative.
Other components include the creation of a new consumer-oriented initiative "to kick start the secondary lending market," funds for loan modification and foreclosure prevention and a "capital buffer" for banks so they can continue lending to consumers and business."
Here's a breakdown on the costs:
The consumer lending facility will "leverage up to $1 trillion dollars" and is intended to "bring down borrowing costs for responsible borrowers and help get credit flowing again."
The housing measures will provide as much as $50 billion in funding, which follows through on an earlier pledge of the Obama administration.
The summary does not provide a sum for the toxic asset fund or so-called buffer capital for banks.
The bank capital provision also calls for a "stress test" among "uniform standards to help clean up and strengthen banks."
Thus far, the TARP has provided aid to firms through capital injections, for which the government received preferred stock and warrants in return. The government also recently started using insurance and guarantees to back certain toxic assets held by firms. Known as a ring fence concept, the model has been used on Citigroup [C 3.56 -0.39 (-9.87%) ] and Bank of America [BAC 5.8299 -1.0601 (-15.39%) ]. It is unclear where the ring fence figures into the new plan.
The Treasury plan also includes measures to "increase transparency and accountability to protect taxpayers."
Chief among them are restrictions on stock dividends and repurchases as well as acquisitions "to provide assurance that all taxpayer money will go to promote lending until that money is paid back."
Also included are previously-announced restrictions on executive pay, and new tighter reporting requirements for banks receiving government aid.
Mikey says:
Here is the view of CNBC viewers on the plan..
CNBC Poll: Tell Us What You Think
Will Geithner's financial rescue plan work? * 9688 responses
Yes
20%
No
65%
Undecided
15%
Not a Scientific Survey. Results may not total 100% due to rounding.
Mikey votes Yes
I know the market tanks 300 points after the speech. Rememeber I like uncertainty They will keep doing the same thing until the problem is solved and the market is 3000 points higher. Until then I look for buying opportunities and let others worry about it. They will give the naysayers enough rope and time to hang themselves. The voices of the critics will be so loud that it will drown out the solitary voice of reason and solution. The solution will be succesful and the naysayers will find something else wrong with the world.
This is all part of the game. I promise you none of us will figure out which one of these rallies will be the one that goes. I will say that when it does go everyone will be selling into it. That is why trading is so non productive. That is why margin and options will kill you. I know they have killed me in the past. You just have to make what you can make and not try to get rich.
Patience and the understanding that what needs to happen, will happen, and that is all you can do. Every rally we have I think is going to be the one and up until now it has failed but I know one of those rallies will go. Then question that everyone wants to know is when. I have learned that when I try to figure out the when I am always wrong. Time is the biggest killer in achieving you goals. If something does not happen in a certain time period people give up. Then it happens. Knowing that it will happen is enough for me. Until then I will watch the show as it is quite entertaining. The beat goes on...... Mikey
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