The US stock market plunged as it became clear that the plan did not yet address how to rid banks of the toxic mortgage assets clogging their balance sheets, or set out the scale and terms of more government cash infusions for the most troubled banks.
In the face of renewed uncertainty, investors lunged for the safety of government bonds, sending US Treasuries higher and riskier assets – including stocks – much lower. Last night, the Dow Jones Industrial Average closed down 4.6 per cent, or 382 points, at 7,889. Earlier, the FTSE 100 had dipped lower as the US Treasury Secretary, Tim Geithner, began outlining the stimulus package at Treasury Headquarters in Washington DC. The FTSE closed down more than 2 per cent at 4,213. On Wall Street, banking stocks led the way down, and Bank of America and Citigroup – both of which have received two government bailouts already – fell by 19 per cent and 17 per cent, respectively.
Responding to criticism from Congressional leaders, Mr Geithner said the Obama administration's plan put in place "the broad architecture", with details to be fleshed out in the coming weeks. But Kevin Logan, a senior US economist at Dresdner Kleinwort, said: "They have a plan for a plan but they don't really have a plan. The whole proposal is so vague as to create new uncertainty, and maybe the problem is really so bad that they haven't worked out how to solve it."
The major disappointment on Wall Street was with the "public-private investment fund" designed to buy the toxic assets on banks' balance sheets, which would be set at an initial $500bn and scaled up to $1trillion, with money from the Treasury, the Federal Reserve and institutional investors.
Yesterday's announcement ducked the central question of how to value the toxic assets. It is an issue that confounded Mr Geithner's predecessor Hank Paulson, who ditched a plan for the government to buy assets directly, instead focusing on direct capital injections for the banks.
The Treasury said its programme would be "designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital". The involvement of private-sector money would mean the government was not setting the price, it added. The exact mechanism, though, could take weeks to decide. Joseph Lavorgna, an economist at Deutsche Bank, said: "It is not big enough. There are few details. The administration is trying to buy time and they don't get the fact that we need to get something yesterday."
Tony Crescenzi, an analyst at Miller Tabak & Co, said: "It remains extremely uncertain how the Treasury will entice investors to do something they have been avoiding since the start of the crisis."
The dilemma is that pricing the assets too low could make many big banks insolvent, while pricing them above market value means taxpayers handing a no-strings-attached subsidy to lenders. One part of the stability plan that was fleshed out in detail was the Term Asset-Backed Securities Loan Facility, or Talf, which will be expanded from its current $200bn to between $500bn and $1trillion.
Under the Talf, the Federal Reserve lends money to investors in the market for securitised loans, where parcels of credit-card lending, student loans and loans for small businesses are traded. These markets have contracted sharply since the credit crisis began, curtailing the availability of credit and crimping economic activity. The Talf will also be widened to promote funding for the commercial mortgage market, and the Fed will finance existing loans, not just new ones.
The Fed expects to make big profits from its dramatically increased role in the credit markets, according to its chairman, Ben Bernanke, who sought to ease concerns that it was taking on too much risk. Although the central bank's balance sheet has more than doubled to $2trn since the credit crunch began, as it poured large sums into new lending programmes, 95 per cent of its assets are safe investments, and it has taken more than enough collateral, Mr Bernanke said.
The remaining 5 per cent, about $100bn, is in risky assets taken over from Bear Stearns and AIG under emergency measures during two of last year's financial crises. The Fed was "not on the watchlist" of risky banks, Mr Bernanke insisted, adding: "The profits we make on our lending programmes will offset losses."
Apart from the risks, lawmakers also voiced concern that the bailout would encourage financial companies to take too much risk, in the expectation that they could be rescued from the consequences of their bad decisions. Barney Frank, chairman of the financial services committee, pledged to increase Congressional oversight, saying: "It does not seem to me healthy in our democracy for the amount of power now lodged in the Federal Reserve, with very few restrictions, to continue."
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