By: Li Bin Chen
As banks continued to fail, the Treasury unveiled its plan to wipe the banks clean of $500 billion worth of bad assets. After the announcement of the “Bad Asset” plan, bank stocks, among the most badly pummeled sectors in this recession, experience a stock surge. The stocks easily outperformed the 4% gains of the Dow Jones Industrial Average and Nasdaq. Citigroup is one of the banks that had some of the headiest gains with its stock surging more than 20% in the first five minutes of trading. Although these initial reaction were promising, but there were doubt about the future of the country. Due to the announcement, the stocks had surge but everything had to wait until the plan is actually put into practice. The Treasury still hasn’t seen any investors who are willing to buy these toxic assets.
The plan for Treasury to buy up billions in bad bank assets raised hopes that the economy is stabilizing. The stock reaction is a vote of confidence in the implementing of the plan. By getting rid of the bad assets, banks will not be limiting their lending and therefore prolonging the recession. Many economists had felt that stabilizing the banking system is the key to stabilizing the economy. By partnering with private investors, government hopes it can finally flush out toxic assets from banks’ balance sheets. The goal is to buy up at least $500 billion of existing assets and loans, such as subprime mortgages that are now in danger of default. The program could potentially expand to $1 trillion over time as the need increase.