In a major Obama administration effort to ease credit and shore up the banking system, the U.S. government will work with private investors to buy so-called toxic assets on troubled banks’ balance sheets. Treasury Secretary Tim Geithner announced details of the Public-Private Investment Program this morning.
Stocks surged after the announcement. The Dow Jones industrial average rose 497.48 points by the end of the day, or 6.84 percent, to 7,775.86. The Nasdaq composite index was up by 98.5 points, or 6.76 percent, to 1,555.77.
Here are some more reactions to the plan:
Andrew Leonard at Salon.com: “Early returns on Treasury Secretary Tim Geithner’s plan to deal with toxic banking assets: [Princeton economist] Paul Krugman hates, hates, hates it. Wall Street loves, loves, loves it.”
Bill Gross, the co-chief investment officer of Pimco, the world’s biggest bond fund, in The Times of London: “This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically.”
Kirk Shinkle in U.S. World & News Report’s “The Ticker”: “So this plan isn’t perfect, but it is so far the only meaningful road map we have for solving the single largest problem facing the banking sector. It can’t be repeated enough: ‘Toxic’ or ‘legacy’ or whatever name you want to give the darker corners of our banking system have to be valued before lending can resume in a way that will support an economic recovery. Whether the government actually understands the risks it’s taking on as a junior partner to banks, hedge funds and the private equity industry is another question altogether.”
Andrew Clark writing in the London Guardian: “[N]ot everybody is convinced that Geithner’s approach will work. The recent furor surrounding bonuses at insurer AIG has provoked wariness among Wall Street institutions about getting involved in government programmes for fear that their finances will be subject to scrutiny by lawmakers and to popular attack from the public.”
Bob O’Brien writing in Barron’s: “The success of the Public-Private Investment Program is going to depend, to a very large degree, on the mutual trust that the two enterprises — the government and the private investors — share in each other. Unfortunately, that’s a trust that been badly damaged by Congress’s impulse to tax the compensation of employees working for the institutions it’s already financed.”
Jeffrey Sachs, economics professor, Columbia University, writing at Huffington Post: Geithner and [Lawrence] Summers have now announced their plan to raid the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve (Fed) to subsidize investors to buy toxic assets from the banks at inflated prices. If carried out, the result will be a massive transfer of wealth — of perhaps hundreds of billions of dollars — to bank shareholders from the taxpayers (who will absorb losses at the FDIC and Fed). Soaring bank share prices on the morning of the announcement, and in the week of leaks and hints that preceded it, are an indication of the mass bailout at work. There are much fairer and more effective ways to accomplish the goal of cleaning the bank balance sheets.
Dino Kos, managing director at Portales Partners LLC in New York and former executive vice president at the New York Fed, in Bloomberg.com: “The big question is what is the incentive for the banks to sell? What is the incentive for a hedge fund to pay a price close to where the banks have it marked at?”
Statement after Geithner’s announcement by the Financial Services Roundtable, a trade group for the nation’s largest financial institutions: “Combined with other on-going efforts, the plan will help strengthen the economy.”
Douglas J. Elliott, Fellow, Economic Studies, Brookings Institution: “It is critical to deal with the toxic assets. … Will the PPIP succeed? Unfortunately, we will not know until we see the program in actual operation. There are substantial reasons to be concerned that the program will fizzle or prove to be too expensive for the taxpayer, but there are also some grounds for hope.
Brian Knowlton in the New York Times: “The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well.”