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Wall St. celebrates, others wary as US pushes to buy toxic assets

Hub units may join in effort

By Beth Healy
Globe Staff / March 24, 2009
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Investors cheered the Treasury Department's plan to buy up to $1 trillion in toxic assets from banks with the help of private investors, sending blue chip stocks up nearly 500 points, or 7 percent, yesterday even as some economists predicted the program would fall short.

The plan released yesterday is a return to the initial intent of the $700 billion bailout fund approved by Congress last October. Five months later - and after billions of government dollars were spent to shore up ailing banks - federal policy makers are aiming to ease lending by offering banks a way to get rid of bad loans and investments. The program would use about $100 billion of the original bailout money, along with giant federal loans, to encourage private investors to buy from the banks' mortgage-related loans and investments that have lost value or have no market.

Some lenders that may be in a position to unload assets under the program, including State Street Corp. in Boston and Bank of America Corp., said they were studying the plan. A Boston unit of Bank of New York Mellon Corp. said it will likely bid to be among five managers the Treasury will select to buy the investment securities.

"I'm sure we're interested," said Charles Jacklin, chief of Mellon Capital in San Francisco, part of Bank of New York Mellon. He said the government should have started buying bad assets last fall, but "better late than never."

Wall Street, welcoming the details of the government's latest plan to get the economy going, sent all the major indexes up about 7 percent, taking the Dow Jones industrial average to a 7,775.86 close, its fifth-biggest point gain ever. The Standard & Poor's 500 index rose 7.1 percent, to 822.92. The Nasdaq rose 6.8 percent to 1,555.77.

Bank of New York Mellon, which already has a $20 million contract to administer the Treasury's bailout fund, will bid on the new business through its Boston bond group, Standish Mellon Asset Management. Other large firms, including hedge funds and private equity firms, are mulling whether to buy the troubled assets now that the government is offering subsidies. Those include Sankaty Advisors, a debt hedge fund run by Boston's Bain Capital, and Thomas H. Lee Partners in Boston.

MassMutual Financial Group, the Springfield insurer and investment company, said it was reviewing whether it might buy assets under the program, spokesman Mark Cybulski said. "We are not currently considering selling any of our own assets as part of the plan." Fidelity Investments also said it is evaluating the details of the plan.

The Treasury effort targets "legacy" mortgage loans made during the housing boom, as well as securities - devalued assets, sitting on the books of banks, that haven't traded since last year, when the markets for mortgage-backed investments evaporated.

The plan is to have banks bundle loans and offer them at auction. The Federal Deposit Insurance Corp. and Federal Reserve Bank would then lend money to large private investors, from banks to hedge funds, that would bid on the loan packages. The Fed also would expand a program of loans - also up to $1 trillion - to entice private investors to buy mortgage-related securities. Five investment managers would be hired by the Treasury to raise pools of money, matched by the government dollar-for-dollar, that they would use to buy the troubled securities. Treasury will also offer government loans to augment the money pools and increase the buying power of the managers.

BlackRock Inc., the large New York investment firm, yesterday said it plans to participate in the program, as does Pacific Investment Management Co., better know as PIMCO, the bond firm. Curtis Arledge, cohead of fixed-income at BlackRock, said in an interview, "I think all three parts of the program are attractive."

Applicants must raise $500 million in private capital to participate, and apply by April 10. The winning bidders will be informed of the decision by May 1.

Despite nearly $2 trillion in funds being made available to revive the banking system, many economists and financial executives say banks won't lend until the economy starts to improve and the negative sentiment blanketing consumers and businesses begins to lift.

Harvard professor Kenneth Rogoff, a former International Monetary Fund chief economist, said the government is "trying to keep the banks going, trying to hope they'll recover profitability." He said the plan fails to address the fundamental problem - that some banks are insolvent and should not be propped up.

"The worst of all worlds is where the taxpayer is putting in $1 trillion, it's not getting the job done, the management that made the mess is still in place, the regulatory system that created the mess is still in place, and we're just bleeding along," Rogoff said.

In announcing the plan, Treasury Secretary Timothy F. Geithner said the goal is to "use taxpayers' money effectively and wisely to, again, help get credit flowing."

He said the government tried to set it up so taxpayers would benefit alongside private investors if the value of these assets improves over time. Taxpayers, many of whom are outraged over a recession driven largely by Wall Street's excesses, also will share the risks if the assets don't gain in value.

Many of the loans in question are still performing, and many of the securities still have value. By kick-starting the markets for them, allowing the assets to be purchased at what might be considered bargain prices, the government is increasing the likelihood they will gain value in the long term. The idea is that banks will be relieved of the burden of carrying assets for which there is no market, freeing up cash and increasing the flow of credit for car, home, business, and other loans.

"The original plan foundered on the issue of how to price the assets, and this new plan doesn't fundamentally solve that problem," said William Poole, former head of the Federal Reserve Bank of St. Louis. "Pricing these assets is still going to be very complicated."

That's because not all toxic assets were created equal. Some are simply home loans offered by banks that have since soured as people fell behind on their mortgage bills. The more pernicious assets are those backed by home loans that were chopped up and packaged into securities and sold to investors across the globe.

Geithner also said the government did not want to "benefit people who got us into this mess," in a reference to the $165 million in bonus payments made to employees of insurer American International Group. In the case of the toxic-asset program, there are no limits being placed on the executive compensation of companies that participate.

Speaking at a hearing on bank lending on Beacon Hill yesterday, US Representative Barney Frank, the Newton Democrat who is chairman of the House Financial Services Committee in Washington, called the Treasury Department's plan "essentially what has to be done given the situation. The alternatives are even worse."

Robert Gavin and Ross Kerber of the Globe staff contributed to this report. Material from the Associated Press was also. Beth Healy can be reached at bhealy@globe.com.

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