Forex Investment and Currency Trading

The following is news article that summarizes the announcements from the US Treasury Secretary today. Overall with a lack of ground breaking initiatives the markets will see these announcements as negative for risk. For currencies we will see weakness in non dollar currencies (except Yen) over the next 24-48 hours.

Market News International - After much anticipation, Treasury Secretary Timothy Geithner announced what he called a “comprehensive” and “forceful” new Financial Stability Plan, but the announcement disappointed Wall Street because it appeared to be still be a work in progress.

The plan also left unanswered the key question of how banks’ so-called “toxic assets” will be priced.

The plan is more decisive when it comes to enlarging and broadening the Federal Reserve’s Term Asset-Backed Securities Loan Facility (TALF), which will now go to “as much as $1 trillion” from the originally-planned maximum of $250 billion, and include a broader array of asset backed securities as collateral for Fed loans.

But despite Geithner’s calls for urgent action, the actual start of the TALF program is still delayed. The Fed said the start of TALF operations “will be announced later this month.”

Without mentioning a “bad bank” per se, Geithner’s plan calls for the creation of an entity which he called a Public-Private Investment Fund to absorb bad assets.

The program “will provide government capital and government financing to help leverage private capital to help get private markets working again,” he said. “This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions.”

But it was not clear how or when the Public-Private Investment Fund will remove bad assets from bank balance sheets and at what price.

In fact, this has not yet been determined, Geithner made clear.

“We are exploring a range of different structures for this program, and will seek input from market participants and the public as we design it,” he said. “We believe this program should ultimately provide up to one trillion in financing capacity, but we plan to start it on a scale of $500 billion, and expand it based on what works.”

Geithner also hinted somewhat vaguely at new capital injections into banks.

“Those institutions that need additional capital will be able to access a new funding mechanism that uses funds from the Treasury as a bridge to private capital,” he said. “The capital will come with conditions to help ensure that every dollar of assistance is used to generate a level of lending greater than what would have been possible in the absence of government support.”

He added that “this assistance will come with terms that should encourage the institutions to replace public assistance with private capital as soon as that is possible.”

Geithner said “the Treasury’s investments in these institutions will be placed in a new Financial Stability Trust.”

He vowed, “we’re going to require banking institutions to go through a carefully designed comprehensive stress test, to use the medical term. We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it.”

The most well thought out part of the Financial Stability Plan would seem to be the pre-existing TALF.

First approved by the Federal Reserve Board last November, the TALF was originally capped at $250 billion. Terms and conditions were announced last Friday in preparation for an announcement to be made about the start of operations “later this month.”

Under the TALF, the New York Federal Reserve Bank was scheduled to begin lending indefinitely to a broad array of financial firms, including hedge funds, willing to invest in various asset-backed securities — bundles of auto loans, credit card debt, small business loans and student loans.

Under the new plan, in addition to the AAA-rated asset-backed securities (ABS) originally included, the TALF program will include other types of newly issued AAA-rated ABS, such as commercial mortgage-backed securities, private-label residential mortgage-backed securities, and other asset-backed securities.

The Fed said “the TALF would be supported by the provision by the Treasury of additional funds from the Troubled Asset Relief Program” and said “decisions concerning the expansion of the TALF, which will be made in consultation with the Treasury Department, will draw on initial experience in administering the program and the Board’s assessment of the likely effectiveness of possible enhancements to the program in advancing its broad economic goals.”

In announcing the plan, Geithner said, “Without credit, economies cannot grow at their potential, and right now, critical parts of our financial system are damaged. The credit markets that are essential for small businesses and consumers are not working.”

“Instead of catalyzing recovery, the financial system is working against recovery,” he said. “And at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it.”

Geithner asserted that “Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses,” while also imposing “new, higher standards for transparency and accountability.”

Geithner said the plan “is going to require an unprecedented level of cooperation, here in the United States and around the world” and said it “will require a substantial and sustained commitment of public resources.”

Geithner said he and Fed Chairman Ben Bernanke will be discussing plans to combat the financial crisis and recession with their counterparts from the Group of Seven nations Friday and Saturday.

By Steven K. Beckner  ** Market News International Washington Bureau: 202-371-2121 **