Timothy Geithner: my plan for bad bank assets

The US Government is today launching a $500 billion (£343 billion) investment programme which will use public and private finance to buy the legacy mortgage assets from banks that are hindering the flow of lending in the financial markets.

The new initiative, called the Public Private Investment Program, will use US Treasury Capital and financing from the Federal Reserve, the Federal Deposit Insurance Corporation as well as money from private investors, to create a fund that will buy the so-called "toxic assets" that are preventing banks from providing more liquidity to the lending markets.

In an article published this morning in the Wall Street Journal, Timothy Geithner, the US Treasury Secretary, said that the funds will be open to participation by a wide range of investors, including pension funds and "will ensure that private-sector participants share the risks alongside the taxpayer".

The initial funding programme will have sufficient resources to buy $500 billion worth of legacy mortgage assets but could be expanded to up to $1 trillion, "a substantial share of real-estate assets originated before the recession that are now clogging our financial system," wrote Mr Geithner.

The ability to sell legacy assets to the fund will make it easier for banks to raise new capital from the private sector and replace government support for the banks provided by the US Treasury, wrote Mr Geithner.

The Treasury Secretary suggested that the Public-Private Investment Program was better for the American taxpayer than if the Government on its own directly purchased real estate assets from banks.

He wrote: "Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets."

The crisis was caused by banks taking too much risk, suggested Mr Geithner, but the danger now was that they would take too little risk. Simply hoping banks to work off the risks over times "risks prolonging the crisis in a repeat of the Japanese experience".

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