The market needed some details
I previously wrote on this blog that the stock market hates uncertainty. Conversely, it loves assurance. The Treasury Secretary’s announcement of the new bank rescue plan addresses the problem of toxic assets and how the government plans to relieve banks and financial service companies of up to $1 trillion of this liability.
These toxic assets have acted like a figurative anchor locked around the figurative ankles of the banks. As has been discussed on this blog, the banks have reduced lending and sought to preserve capital as they wrestle with tarnished balance sheets.
As you will remember, the Treasury Secretary had the opportunity to make this very announcement weeks ago, but provided only sketchy details. The stock market reacted and we saw a continuous sell-off that has depleted the wealth of retirement accounts everywhere.
Now the government has articulated their plan to help the banks and free up the credit markets by using a combination of government and private intervention.
Banks need to resume lending
The lingering question in recent months has been, how does the government price and dispose of billions in toxic assets? With no answer to this question, the DOW fell to a twelve year low in early March. The announced plan would have the government making use of $75 to $100 billion of TARP funds. The government would partner with the private sector and hedge funds to buy up billions in toxic assets.
The private sector is the wild card in the equation. How much participation can the government expect? Will investors go for the risk-reward equation as they see it? According to a March 23rd story by the AP, ‘Under a typical transaction, for every $100 in soured mortgages being purchased from banks, the private sector would put up $7 and that would be matched by $7 from the government. The remaining $86 would be covered by a government loan.’
The FDIC will also contribute to the new plan by purchasing up to $500 billion of residential and commercial loans. This was anticipated to help clean up banks balance sheets. Additional bank failures are still anticipated.
