March 23, 2009— -- President Obama said today that his economic team is "very confident" that the administration's newest effort to stabilize banks -- a mix of public and private funds that could total $1 trillion -- will help to free up credit.
The president spoke shortly after Treasury Secretary Timonthy Geithner officially announced the long anticipated program.
The plan aims to remove so-called toxic assets -- many of them bad mortgage investments -- from the banks' balance sheets through a private-public partnership. The program will rely heavily on private investors, such as hedge funds and private-equity firms, to buy up $500 billion to $1 trillion of assets with the government providing incentives such as low interest loans and sharing in both the risk and possible profits.
The plan announcement jolted stocks on Wall Street, with the Dow Jones industrial average rallying nearly 500 points, or 6.8 percent, to 7785.86 -- the fifth biggest point gain in history.
Obama described the Public-Private Investment Program as "one more critical element" in a multi-pronged effort to help the economy recover.
He gave an optimistic assessment that the steps the administration has taken are nudging the economy in the right direction.
Obama said there are "glimmers of hope in the housing market," as well as signs that there is easier access to student loans, small business and car loans.
With the announcement of the latest mega-money project to right the economy, Obama said, "I'm very confident that... we're going to be able to make it happen."
With the bad assets off their balance sheets, banks would be expected to start lending again.
Wall Street seemed buoyed by the announcement, with the Dow up more than 400 points in the day's trading. That was in contrast to last month when Geithner first indicated the administration was considering such a plan, but the lack of details sent the market into a nearly 400 point plunge.
Investment giant BlackRock was downright enthusiastic about the new program.
The investment management firm is applying to be one of the government-selected managers and is willing to raise $5 billion or so of private money to partner with taxpayer dollars, Curtis Arledge, co-head of US Fixed Income Portfolio Management Group, at BlackRock told ABC News.
"We think many of these assets are trading at prices well below their intrinsic value," Arledge said.
BlackRock has already been buying such investments for some of its clients but now hopes to purchase more assets. Arledge said the government dollars and risk guarantees will expand the number of people who enter the mortgage-backed securities market.
The $1 trillion program is Obama's latest attempt to pull the economy out of its dive, but it's not the last. On Tuesday, the administration wil lay out its plans to increase its regulation of Wall Street to ensure that the current crisis is not repeated.
The administration needs to address two problems. First, banks are not lending because their balance sheets are weighed down by these deteriorating toxic assets. Second, the assets are tough to price because of currently depressed pricing levels.
To solve these problems, the treasury's plan is guided by a program with three general principles.
The new program will use between $75 billion-$100 billion of Treasury funds from the Troubled Asset Relief Program and leverage $500 billion with the potential to expand to $1 trillion of private purchasing power with financing from the Federal Reserve System and the Federal Deposit Insurance Corp.
Using the Fed and the FDIC, the government will leverage private capital by co-investing with the private sector. If the private sector has financing provided by the government, buying these assets becomes a more attractive option.
Second, the administration wants the market, not the government, to set the price for these assets.
"The greatest waste of taxpayer dollars would be us paying too much," an official said.