US eases terms of $1trn toxic asset plan amid take-up fears about take-up

The US Treasury has extended the deadline and lowered the requirements for investment firms to participate in its $1 trillion (£678bn) public-private partnership scheme. It is a worrying sign that the plan to rid banks of their toxic assets is not gaining the hoped-for support.

Tim Geithner, the US Treasury Secretary, two weeks ago said the government would lend money to private firms to help them bid for loans and mortgage securities that have been gumming up bank balance sheets for 18 months. But it remains unclear whether buyers and sellers will ever be able to agree a price.

A prominent US banking industry analyst yesterday made waves in the market by calling the plan a "Catch-22" situation and suggesting that the worst is still not over for the nation's troubled banks. And the news that the Treasury has modified its plan pushed banking shares down and led to a sell-off in the broader equity market.

The deadline, originally this Friday, has been pushed out by two weeks, and the government is going to solicit interest from minority and female-owned investment managers. The participation criteria will also be "viewed holistically", the Treasury said, adding: "Failure to meet any one criterion will not necessarily disqualify a proposal."

Mr Geithner believes that handing cheap government loans to the private sector will allow them to bid higher for toxic loans and mortgage securities which banks have been unwilling to sell at fire-sale prices. Last week, accounting standards-setters said they would allow banks to hold loans on their books at above-market prices in some cases, potentially making them less likely to sell them.

Mike Mayo, a veteran banking sector analyst, publishing his first research for the firm Calyon Securities, said yesterday that mortgage securities have already been substantially written down, but that other types of loans are still being held on banks' books at 98 cents on the dollar, meaning the banks are still sitting on hidden losses. "The main issue over the next couple years is the level of loan losses, which we expect to exceed the level of the Great Depression," he said. Losses are currently 2 per cent, but could reach 3.5 per cent, above the 3.4 per cent hit in 1934.

He predicted "a rolling recession" as problems ripple through different areas of the banks' profligate boom-time lending. "Government can help, but the industry is in a Catch-22 since either efforts go easy on banks and leave the toxic assets on balance sheet, or go hard and require large, new dilutive capital raises after stress tests are completed in late-April."