Ross: Due Diligence Integral to Success of US Plan
The U.S. Treasury detailed Monday its plan to purge banks of toxic assets with the help of private investors, a key part of Washington's drive to pull the world's biggest economy out of severe recession.
Wilbur Ross, chairman and CEO of WL Ross & Co, told CNBC's Asia Squawk Box that he thinks the key issue is due diligence -- will private investors be allowed to to conduct an in-depth study of the toxic assets?
"That's essential because these are very complex assets and they’ll be bundled together into fairly large pools", Ross said.
Ross was very impressed with the Troubled Assets Relief Program (TARP) sale held last Thursday. "That was a very impressive opening event in that they sold ... $80 million dollars worth of commercial paper, mostly backed by car loans and that's about twice as much as has been done in the whole prior three months", Ross said.
"Most importantly, about half the volume was done by people like us, coming in on leverage, the other half was done by normal conventional buyers of commercial paper. So the very fact of the existence of the TARP brought back traditional investors even though the normal commercial paper investor doesn’t use leverage. I think that these programs have been very well conceived", Ross added.
The scheme to rid banks' balance sheets of up to $1 trillion of bad loans and securities that thwart lending, is central to President Barack Obama's effort to revive the economy and the stakes are very high.
Ross observes that the government is trying to place $1 trillion dollars. "That's a big number under any circumstance, particularly under the relatively disorderly markets we've had. And it represents something like 1/12 or 1/13 of total bank assets. So it will be watched scrupulously ... it's really important to get that one glued."
Treasury Secretary Timothy Geithner, due to brief on the toxic assets plan at 8:45 a.m. ET. The plan includes incentives in the form of abundant loans and generous terms to entice private investors to buy the unwanted assets. Aspects of the plan, have been leaking out to various news organizations, including CNBC, over the past few days.
The Treasury's plan is to include setting up an entity to be used by the Federal Deposit Insurance Corp, the main U.S. banking regulator, to offer low-interest loans to private interests for buying up banks' soured assets.
Treasury will also hire investment managers to run the public-private funds to invest for potential profit in troubled mortgages, with government capital matching private capital contributions.
Finally, the Federal Reserve will expand its new consumer loan-focused $1 trillion Term Asset-Backed Securities Loan Facility to buy so-called "legacy" assets, the source said.
Much is at stake in the U.S. financial clean-up for the world economy, mired in its deepest slump since the 1930s Great Depression, and with many nations, particularly in Asia, relying on U.S. recovery to kick-start their export-dependent economies.
U.S. stock futures and Asian share markets were sharply higher on Monday. Currencies that were sold off heavily during bouts of market volatility, such as the Australian dollar or sterling, also rose.
The euro climbed to a five-month high against the yen after European Central Bank President Jean-Claude Trichet said euro zone rates were already low and the ECB might turn to unconventional measures to get credit flowing again.