US unveils $1tn toxic asset plan

US unveils $1tn toxic asset plan

The US has announced details of a plan to buy up to $1 trillion (£686bn) worth of toxic assets to help repair banks' balance sheets.

The "Public-Private Investment Programme" will purchase the troubled mortgages and securities that have been at the root of the credit crunch.

The Treasury has committed $75bn to $100bn to the programme and said the private sector would also contribute.

On Wall Street key share indexes soared by up to 7% on the news.

The widely followed Dow Jones index gained nearly 500 points or 6.8% to close at 7,775 points, while the wider S&P 500 index was up 7.1% or 54 points to reach 823. Technology shares on the Nasdaq index ended the day up 99 points or 6.8%, at 1,556.

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What are peoples opinions? Is this going to help in the long-term? Most worries so far I've heard that this might rally the stocks for perhaps a week or two, but with everything still being unsure in the markets that it's not going to show beyond that. Any chance that this will have a long-term effect?

As long as the source of the problem is not regulated, this will be a short term solution only. The banks wouldn't have toxic assets if they were prevented from engaging in non-sustainable lending processes... as long as that leak continues, the trillion dollar absorption plan will simply be bailing water out of a boat that has an unplugged hole in it.

Given the estimated max of the purchasing, the Fed rates the mortgaged backed securities at 50 cents on the dollar. I don't know if they are worth that.

It might work. By taking off the bad assets, banks are no longer saddled with the associated debt that came with them. With no need to conserve cash to meet those obligations, they can then lend them out. What this does not change is the lines of credit. If I Bank of America and had $500 billion in lines of credit, I would still be conserving cash to meet those off balance sheet liabilities.

The upside to this is, if it works and the housing market rebounds, the Fed can sell them off for close to face value and pocket the spread just like it did in Chrysler back during Lee Iacocca's day.