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US stocks surge on toxic asset plan

By Krishna Guha and Edward Luce in Washington and Francesco Guerrera, Julie MacIntosh and Michael Mackenzie in New York

Published: March 23 2009 13:11 | Last updated: March 24 2009 08:58

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US stocks soared on Monday after Treasury Secretary Tim Geithner detailed his proposals for public-private partnerships to deal with toxic assets in the financial system and prominent investors vowed to take part in the programme.

Asian markets continued the rally in Tuesday trade.

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Bill Gross, founder of Pimco, the bond fund manager, said, “This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate.”

Toxic assets thumbnailLarry Fink, chairman of BlackRock, the asset management company, said his company would also take part. “I think it is a very important step that the government is assisting private capital and creating new demand for these troubled assets.”

Investors appeared particularly enthused by the prospect that the government would arrange financing for the joint ventures on generous terms. Senior private equity executives who had discussed ideas with administration officials beforehand,said the key terms yesterday went beyond their own wishlists

“This will make it easier for banks to raise capital privately because they will have a cleaner balance sheet,” Mr Geithner said on Monday. The government will allocate $75bn (£51bn) to $100bn, which will be leveraged up with loans from the Federal Deposit Insurance Corporation and the Federal Reserve.

In a radical departure, the Fed said it will provide loans to investors willing to buy toxic “legacy” securities – including risky subprime mortgage-backed securities no longer rated triple A – for the first time. The central bank and the Treasury on Monday issued an unusual joint statement setting out their relative responsibilities for fighting the crisis.

The S&P 500 rose more than 7 per cent, the biggest one-day advance under the Obama administration, closing above 800 for the first time since mid-February. Banks led the market higher, with Bank of America gaining 26 per cent.

Key points

$75bn-$100bn from Tarp invested with private equity in a public-private fund worth $500bn

Investors and public-private funds buy bad loans from banks at auction, with loans guaranteed by FDIC

Five fund managers approved by Treasury to invest private capital and public-private fund equity in toxic securities

The Fed’s Talf programme expanded to include toxic securities, including residential mortgage-backed securities

Criticism came from economists such as Paul Krugman, the New York Times columnist, who said the non-recourse government loans would allow private partners to make large profits if their bets went well, while leaving taxpayers with the overwhelming share of losses if the bets went badly wrong.

Political analysts said the embattled Mr Geithner had regained some control of the economic debate, which had been dominated by rage over bonuses at AIG, the crippled insurance group.

There will be two new schemes – one for the legacy securities and one for whole loans, both of which will focus on real estate-related credits. Under the legacy securities plan, the government will authorise up to five investment managers to raise equity and provide a dollar of equity and between one and two dollars of debt for every private dollar raised.

Geithner’s bank plan

Under the legacy loans plan, the government will provide matching equity while the FDIC will guarantee up to $12 in loans for every dollar of private equity at risk.

Banks will submit pools of loans for auction. Banks said the plan’s structure was favourable to them as it gave them the last word on whether to sell their toxic assets.

Obama fills key Treasury posts

Additional reporting by Sarah O’Connor

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