July 8, 2009
Too late to rescue banks
WASHINGTON – A GOVERNMENT plan designed to rid banks’ books of the troubled assets that exacerbated the financial crisis will do little to address a fundamental weakness of the industry or the broader economy, analysts say.
WILL IT WORK?
Mr Ross said banks will never break even on many of their troubled assets, but that the government plan will get them five-to-10 percentage points closer.
The PPIP was initially expected to remove up to US$1 trillion in bad assets off the banks’ books. But Mr Ross said the programme likely will max out at US$125 billion.
The Treasury Department this week will announce the names of between five and 10 fund investment firms participating in the multibillion-dollar plan, according to two industry officials.
The plan, known as the Public-Private Investment Program, or PPIP, will leverage private capital with government subsidies so that these investment firms can buy up the soured mortgage-related assets that have clogged banks’ balance sheets and made them reluctant to lend freely to businesses and consumers.
But since announcing the plan five months ago, the government has shelved part of it that would help these firms buy individual mortgages and other loans held by the banks. As a result, some analysts say its impact will be muted.
Fears of a deeper recession, including rising unemployment and falling home values, raise the spectre of massive defaults on consumer and commercial real estate loans, analysts said.
But the securities backed by mortgages and other complex assets to be targeted by PPIP are no longer as big a threat to the banking industry’s stability, analysts said.
Ten of the nation’s biggest financial companies – including JPMorgan Chase & Co, American Express Co and Goldman Sachs Group Inc – last month got the go-ahead to return US$68 billion (S$99.5 billion) in federal bailout money, a development viewed as evidence that the financial sector was beginning to stabilise after benefiting from the government’s US$700 billion financial rescue fund.
Some of the PPIP managers are expected to include Blackrock Inc, Pacific Investment Management Co and TCW Group Inc, according to the two industry officials. Billionaire investor Wilbur Ross said on Tuesday that he would use up to US$1 billion to participate. — AP