US Treasury to pump billions more into banks
TIMOTHY GEITHNER, the US Treasury secretary, will tomorrow set out the American government’s plan to inject billions of dollars into the country’s troubled banks and ringfence their toxic assets.
The announcement is seen in the markets as key to steering the global economy out of its deepest postwar recession, along with President Barack Obama’s $820 billion (£555 billion) fiscal-stimulus plan.
It follows gloomy news, including a 598,000 drop in non-farm payroll employment on Friday, a figure described by analysts as “horrific”.
The US Treasury plan for the banks, a revamp of the original $700 billion bailout plan agreed with Congress by the Bush administration’s Treasury secretary, Henry Paulson, is expected to involve a wide range of measures but will stop short of creating a so-called “bad bank”.
Geithner is likely to indicate the Treasury’s willingness to increase its stakes in banks considered short of capital, but will not take majority ownership, as has happened in Britain.
The US government will not move towards nationalising its banks, sources in Washington said. This is regarded as even more controversial and unpopular in America than in Britain.
If any bank was so short of capital that this appeared likely to occur, officials would decide whether to liquidate the institution, place it into receivership or retire its assets over time.
About half of the original $700 billion had been allocated by the time George Bush left office. Geithner, formerly head of the New York Fed, is set to expand the lending facility originally set up last year to purchase asset-backed securities from the banks.
This, originally established as a $200 billion programme, involved lending by the Federal Reserve to finance education, car and credit-card loans. “They need to get credit flowing again,” said Kenneth Rogoff, a Harvard University professor and former chief economist at the International Monetary Fund. “To do that they need to clear the decks somehow. The financial system is just dead in the water.”
Stephen Lewis, chief economist at Monument Securities, said markets were keenly awaiting tomorrow’s announcement. “They have faith in Mr Geithner to find a way to banish the spectre of bad debts and writedowns, so freeing the banks to lend again as they did in the past,” he said.
Rumours the administration would seek to suspend so-called “mark to market” accounting, which has exacerbated the problems of the banks’ bad loans, boosted Wall Street last week, though were subsequently played down by officials.
Obama has already signalled that he will insist on a $500,000 salary ceiling for institutions helped out under the plan.