US to buy up $500bn in toxic bank assets
The Obama administration has announced a new scheme to buy up as much as $500 billion (£343.2 billion) in bad banking assets.
The programme will create public-private partnerships between the government and the participating institutions and is part of a larger continuing effort to rescue the frozen credit market and failing banking system.
The scheme has the potential over time to buy up to $1 trillion of assets.
The plan will work by subsidising private investors' purchases of troubled bank assets with US taxpayers' money. The Federal Deposit Insurance Corp, Treasury Department and the Federal Reserve will also be involved.
The administration is hoping the proposal will successfully lure private capital into the rescuing of troubled banks and allow market forces to set prices for assets that are harder to value.
The plans involve an initial commitment of $75 to $100 billion, with the goal of eventually buying at least US $500 billion in bad loans and subprime mortgages.
The proposal is said to be a more favourable option than nationalising banks or allowing the market alone to solve the banking problems.
Announcing the plans on Monday, the US treasury said: "This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly.
"Simply hoping for banks to work legacy assets off over time risks prolonging the financial crisis."
Critics of the programme claim the move is not aggressive enough. They also warn that government loans would pose too much risk to taxpayers, as the government will shoulder the loss if the assets go bad.
In the UK, Lloyds Banking and Royal Bank of Scotland have signed up to the British government's own asset protection scheme - placing the burden of over £500 billion worth on toxic assets on the taxpayer.
Barclays is also in negations to join the UK scheme.
Investors have been waiting for the US programme's details since Treasury Secretary Tim Geithner announced last month the outline of a plan to address the major problems facing the banking sector: toxic assets and shortage of capital at major institutions.
In addition to the new public-private partnerships, the government plans to expand a Federal Reserve initiative begun last week that aims to encourage lending to lower-rated mortgage-backed securities.
Known as the Term Asset-Backed Securities Loan Facility, the plan creates partners of buyers and sellers to help meet the credit needs of households and small businesses.
Johanna King
Comments
Newsletter sign up