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US drops plan to buy toxic assets By Krishna Guha in Washington and Michael Mackenzie in New York
http://www.ft.com/cms/s/0/6cdb3ee0-b0ef-11dd-8915-0000779fd18c.html?nclick_check=1
Published: November 12 2008 19:29 | Last updated: November 13 2008 01:00
The US government on Tuesday abandoned its plan to buy toxic assets, feeding a gathering sense of gloom as investors fled from risk and US equity markets sank to levels approaching their October lows.
The decision to drop asset purchases marks a stunning reversal by Treasury Secretary Hank Paulson, who made the plan the centrepiece of his pitch for the $700bn troubled asset relief programme (Tarp), which passed only after a tumultuous battle in Congress.
EDITOR’S CHOICE FT interview: Paulson on capitalisation fund - Nov-12Lex: Tarp recast - Nov-13FT Alphaville: The TERP - Nov-12Treasury chief wins Capitol Hill plaudits - Nov-12Asia falls sharply on Tarp funds decision - Nov-13Wall St falls amid fresh concerns over toxic assets - Nov-12“Our assessment at this time is that this is not the most effective way to use Tarp funds,” Mr Paulson said. He said the $410bn in uncommitted funds would be better spent on an expanded programme to recapitalise financial companies, support markets for securities backed by consumer debts and prevent foreclosures.
The Treasury Secretary said it was clear by the time Congress passed the Tarp legislation that the plan to buy assets would “take time to implement and would not be sufficient given the severity of the problem”. Capital injections offered a “more powerful” way to shore up the financial system and support lending.
“I will never apologise for changing an approach or strategy when the facts change,” Mr Paulson said.
The S&P 500 index, already weak before Mr Paulson spoke, closed 5.2 per cent lower at 852.30 points, near last month’s low of 848.92 points.
Citigroup shares fell more than 10 per cent to close below $10 for the first time since the 1998 merger between Travelers and Citicorp. The FTSE Eurofirst 300 index tumbled 3.4 per cent.
“For the Treasury to come out and now say they are not going to do what they originally planned, is a real credibility problem,” said Jim Sarni, portfolio manager at Payden & Rygel.
Measures of risk aversion flared, with the implied yield on four-week Treasury bills falling to 4 basis points. Meanwhile, oil dropped $3.17 a barrel to $56.16 in a sign of growing fears of a deep global economic slowdown.
Mr Paulson said the Treasury was evaluating a programme in which the government would provide funds to match those that financial institutions were able to raise from private investors and said such a scheme could be open to non-bank financial firms.
But Mr Paulson signalled that Treasury would wait until it had time to evaluate the first round of recapitalisations before embarking on a second, which looks increasingly unlikely to happen before the next administration takes office.
Mr Paulson said the Treasury was working with the Federal Reserve to develop a large-scale financing programme for asset-backed commercial paper.
Meanwhile, the Barack Obama transition team said he would send Madeleine Albright, a former Democratic secretary of state, and Jim Leach, a former Republican congressman, to represent him at the G20 summit of world leaders this weekend.
Additional reporting by Aline Van Duyn and Francesco Guerrera Copyright The Financial Times Limited 2008
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