Government 'bad bank' plan submitted to Congress

22 September 2008

The government plan to stabilise the US financial system has been submitted to Congress in revised form.

Treasury secretary Henry Paulson has shifted the terms of the $700 billion scheme to incorporate other "bad" assets, apart from complex financial products relating to the mortgage market.

The government wants to use the fund to form a "bad bank", in which banks would be allowed to put the toxic derivatives which are currently clogging up their balance sheets.

It is hoped that this will then free the firms up to lend more to each other, boosting trust both within the sector and among its investors.

The proposal was greeted ecstatically by the markets on Friday, with the Dow Jones putting on 3.35 per cent.

However, some politicians have expressed concerns over its cost to the public purse.

Speaking to Bloomberg, Shane Oliver at AMP Capital Investors commented: "The Treasury's thinking is to make it as big and wide as possible so they have the flexibility to act if need be.

"There have been losses on a whole range of US debts and as the economy deteriorates in response to the housing slump those losses could escalate."

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