U.S. stocks rallied Monday, closing the day up almost 500 points following the Treasury’s unveiling of a plan to help banks get rid of bad assets.
The Treasury unveiled The Public-Private Investment Program as part of its efforts to “repair balance sheets throughout our financial system and ensure that credit is available to the households and businesses, large and small, that will help drive us toward recovery.” The plan will use between $75 billion and $100 billion in TARP and private investor capital to generate $500 in purchasing power to buy legacy assets.
The Treasury has promised it will “make the most of taxpayer resources” by using government financing in conjunction with the FDIC and Federal Reserve, along with private sector investors. Should there be a downside scenario, the Department says as private sector participants invest alongside with taxpayers, private sector investors stand to lose their investment while the taxpayers shares in profitable returns.
According to the Treasury, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.
The Treasury released the following statement Monday:
“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. 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.”
CNNMoney reports the Dow Jones Industrial Average gained 212 points in the first 40 minutes of Monday’s session. The Dow closed almost 500 points higher, the S&P 500 jumped 54 points and the Nasdaq jumped up 98 points.
The Treasury said over the past six weeks, it has implemented a series of initiatives as part of its Financial Stability plan that – along with the American Recovery and Reinvestment Act – “lay the foundations of economic recovery.”
Those series of initiatives included refinancing programs for homeowners behind on their mortgage and a loan modification plan to avoid foreclosure, on top of bringing mortgage interest rates down. The Treasury also announced last week its plan to purchase up to $15 billion in securities backed by Small Business Administration loans. The Treasury says it is also launching a new capital program including a forward-looking capital assessment undertaken by bank supervisors to ensure that banks have the capital they need in the event of a worse-than-expected recession. “If banks are confident that they will have sufficient capital to weather a severe economic storm, they are more likely to lend now – making it less likely that a more serious downturn will occur,” according to a statement released Monday.