North American markets got a big boost Monday after U.S. Treasury Secretary Timothy Geithner announced a long-awaited plan to stimulate lending to consumers and businesses, by buying billions of dollars in toxic assets from banks.
The Dow Jones industrial average jumped 497.48 points to finish at 7,775.86. In contrast, the government's bank rescue program announced on Feb. 10 sent the Dow falling some 380 points.
Meanwhile on Monday, the TSX also soared 452.16 points to 8,958.51.
The purchases could grow to US$1 trillion, Geithner told reporters, in yet another attempt to ease the credit crunch, stem the tide of mortgage foreclosures and boost lending to consumers and small businesses.
The plan will use between $75 billion and $100 billion from the previously announced $700 billion bailout program. The funds will be supported by loans from the Federal Deposit Insurance Corp. and a loan initiative operated by the Federal Reserve.
In a typical transaction, for every $100 in bad mortgages purchased from the banks, the private sector would put up $7, which will be matched by the government. The remaining $86 would come from a government loan that would, in many instances, be provided by the Federal Deposit Insurance Corp.
Geithner said it is necessary for the government to accrue so much of the risk, because the alternative is to let the market rectify itself and risk a prolonged recession.
"There is no doubt the government is taking risks," he said. "You can't solve a financial crisis without the government taking risks."
Geithner said he expects a wide variety of investors to participate in the initiative, from pension funds to hedge funds to insurance companies.
The program will lure investors with low-cost loans provided by the Federal Deposit Insurance Corporation and the Federal Reserve.
The administration has worked hard to come up with some way to purchase toxic bank assets. The Obama administration has struggled with issues such as how to price the assets and how to ensure that there are enough government resources to sustain the initiative.
Christina Romer, who heads the White House Council of Economic Advisers, said: "This has never been about helping Wall Street or helping a firm that made mistakes. We're doing this for ourselves. ... It's absolutely about helping a system so that people can get their student loans, and that families can buy their house and buy their cars, and small businesses can get their loans."
The move comes as Geithner faces criticism over the AIG fiasco, which saw the cash-strapped insurance giant pay out executive retention bonuses despite receiving $170 billion in government bailout money.
While congressional leaders have called for U.S. President Barack Obama to fire Geithner, the president has continued to support him.
Following congressional outrage over the AIG affair, some investors have indicated that they are wary of participating in the new program out of concern that Congress will impose restrictions on their own executive compensation plans.
But the Obama administration feels the initiative is the best option to improve the banks' balance sheets, which could contain more than $2 trillion in troubled assets.
According to administration officials, the program will be able to purchase from $500 billion to as much as $1 trillion in troubled loans.
However, analysts believe that because the $700 billion bailout program is nearly used up, there may be only enough resources to get the program off the ground.
Administration officials say they will launch the program and gauge how successful it is before it decides if it needs to request more funding from Congress.
With files from The Associated Press
