Geithner’s toxic assets plan sends markets soaring

Stock markets in Britain, the United States and Europe have rallied today as more details emerged about the US Treasury's $1 trillion plan to help banks wipe toxic assets off their books. The rally was further boosted by a surprise 5.1 per cent rise in American house sales - the biggest monthly increase since July 2003, according to the National Association of Realtors.

The chief economist at High Frequency Economics, Ian Shepherdson, said that while US house prices were still 15.5 per cent down year on year, the increase suggested the property slump of the last quarter may be over.

The stocks rally brought relief to New York, London and Paris. The Dow Jones industrial average soared 6.8 per cent to above the 7,775 mark while the Nasdaq jumped 6.76 per cent to 1,555.77. The FTSE 100 rose by 2.86 per cent to within a whisker of 4,000 points. France's CAC gained 2.8 per cent. Crude oil hit a near-four-month high of $53 a barrel on the New York Mercantile Exchange.

The aim of the US Treasury's so-called Public Private Partnership Investment Programme is to remove those toxic assets that have been preventing the banks from resuming normal lending business, which in turn has threatened to prolong the recession.

To finance the programme, the US Treasury will use between $75bn and $100bn of taxpayers' money, leveraged up with private money to give $500 billion of 'purchasing power' - eventually expected to rise to £1 trillion.

The private money is essential to the plan, as explained on the US Treasury website. Treasury Secretary Timothy Geithner claims that both the taxpayer and the private sector will share in future profits.

The Geithner programme got an immediate boost when Bill Gross, joint chief investment officer of Pimco, the world's biggest bond fund, said that Pimco would work with the US Government to buy toxic assets. "This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically," Gross said.

Geithner - who will be hoping the plan not only saves the economy, but halts the near-constant chatter that he is not up to the job - said the programme was necessary because "many banks, still burdened by bad lending decisions, are holding back on providing credit".

BBC business editor Robert Peston made the point today that the Geithner plan is an alternative approach to that taken by the UK Treasury, which has used taxpayers' money to insure RBS and Lloyds against future losses on some £600bn of poor loans and investments.

WHAT THEY'RE SAYING

Paul Krugman, New York Times: "Why was I so quick to condemn the Geithner plan? Because it's not new; it's just another version of an idea that keeps coming up and keeps being refuted. It's basically a thinly disguised version of the same plan Henry Paulson announced way back in September. I'm afraid that this will be the administration's only shot - that if the first bank plan is an abject failure, it won't have the political capital for a second. So it's just horrifying that Obama - and yes, the buck stops there - has decided to base his financial plan on the fantasy that a bit of financial hocus-pocus will turn the clock back to 2006."

Robert Peston, BBC: "In the US case, taxpayers will be both providing some of the loan finance to buy the toxic assets and will be sharing in the risks of owning them - both losses and profits. As a public-private solution, it has a snake-eating-its-tail, paradoxical quality to it - since at least some of the finance for the purchase of the impaired assets will presumably come from the very banks that are supposed to be cleansed by the exercise."