The US Treasury Monday revealed details of a highly-anticipated plan to set up public-private investment funds that will buy up to $1 trillion in troubled loans and securities at the heart of the financial crisis.
Market reaction was positive with stocks—especially those of financial firms—rising around the globe, while the dollar was stable.
The Treasury’s complex plan to use private funds to purchase toxic assets uses low-cost government financing, government guarantees and government equity as incentives.
The plan has two programs—one to purchase securities, the other to purchase loans from banks.
The initial goal is to "generate $500 billion in purchasing power," as the government put it in its plan fact sheet, but the cost could reach $1 trillion. About $75 billion to $100 billion of the government funding will come from the second tranche of the TARP.
- CNBC Interview With Treasury Secretary Geithner To Air at 2 pm ET
The Obama administration's latest plan comes amid a growing taxpayer backlash about aid to Wall Street, as well as what many consider exorbitant executive pay.
Administration officials Monday addressed those concerns, emphasizing that public and private money was being used together.
"We're sharing in a partnership form," said White House economist Austan Goolsbee on CNBC. "If the private sector profits, then the government profits."
Public and lawmaker fury over the bonuses, and efforts on Capitol Hill to claw them back, have made many investors skittish about partnering with the government. But the Treasury specified that private partners in its latest effort to revive credit markets will not face tough executive pay restrictions.
How The Plan Works
In one initiative, the government will create up to five public-private partnerships, run by approved asset managers, with the government and private firms each providing 50 percent of the capital. The structure is meant to create a market for the troubled assets, which have been difficult, if not impossible, to price since the financial crisis first erupted 18-months ago.
Toxic assets clogging the balance sheets of financial firms could total $2 trillion and generally fall into two broad categories—illiquid or non-performing
The FDIC will oversee the program and will also provide financing along with the Treasury.
Under the PPIF, participating firms will identify the assets, usually as a pool of loans, which will be auctioned off to the highest bidder. The government will determine how much funding is necessary to enable the transaction, with leverage not to exceed a 6-to-1 debt-to-equity ratio.
Though the toxic assets plan has been eagerly-awaited by Wall Street, the Obama administration was careful Monday not to raise expectations unduly. Goolsbee said the latest initiative was "one key brick in what's been a multiple brick process, trying to put the house back together."
The government's Financial Stability Plan also includes a $75 billion foreclosure mitigation plan, up to $1 trillion in support for consumer and business lending and a capital-for-equity swap plan.