U.S. Markets Soar on Treasury's Plan for Banks

When something seems too good to be true... it probably is. The following article explains that Wall Street is excited because of a plan to have investors buy "toxic" assets from banks and then auction them off to the highest bidders.

If I were an investor, I would certainly not be willing to buy these assets anywhere near what they were originally book at by the bank. In order to expect a profit from an auction, I would have to seriously discount assets so that there was room for bidders at an auction to purchase these assets at a lower price than they could purchase them through normal channels. That $600,000 home that now has a market value of $300,000 might have to be sold to investors at $200,000 so that a bidder at an auction could purchase it at $250,000 and walk away satisfied that their bid was worthwhile.

So would someone please explain why this is such a good idea? If it is such a good idea, why aren't the banks simply auctioning off those assets and eliminating the middle man?

U.S. Markets Soar on Treasury's Plan for Banks
Traders work at the New York Stock Exchange Wednesday, March 18, 2009 in New York. (AP
By Ylan Q. Mui
Washington Post Staff Writer
Monday, March 23, 2009; 4:57 PM

A last-minute surge sent stock markets up about 7 percent today following the Treasury Department's announcement of a new plan to help banks cleanse their balance sheets of toxic assets.

The blue-chip Dow Jones industrial average was up 6.8 percent, or 497 points, to 7776, while the broader Standard & Poor's 500-stock index rose 7.1 percent, or 54 points, to 823. The tech-heavy Nasdaq jumped 6.8 percent, or 99 points, to 1556.

The gains amount to a vote of confidence by investors in the program to purchase toxic assets, known as the Public Private Investment Plan. It calls for the government to partner with private investors to buy between $500 billion and $1 trillion in troubled real estate-related loans and securities that have poisoned financial institutions and destroyed investor confidence. Those assets will then be auctioned to the highest bidder, removing them from banks' balance sheets.

"I've heard the secret to success in business is to make plan C work, and I think that's essentially what we have here," said Jim Dunigan, managing executive of investments for PNC Wealth Management.

The financial sector has been leading the charge with a nearly 10 percent gain. Citigroup was up 19.5 percent and Bank of America shot up 26 percent amid heavy trading late afternoon trading. Wells Fargo was up 23.9 percent, and J.P. Morgan rose 24.7 percent.

Energy stocks also rose sharply, gaining more than 8 percent, on news of a $15.6 billion merger between Canadian giants Suncor Energy and Petro-Canada that will create the country's largest energy firm. Shares of Petro-Canada on the New York Stock Exchange jumped 22 percent.

Investors also got an unexpected boost from news this morning that existing home rose sales 5.1 percent to a seasonally adjusted rate of 4.72 million in February compared to the previous month. Many analysts had expected the rate would fall. Still, home sales are still down about 5 percent from a year ago as prices continue to tumble throughout the country, but particularly in the west.

"The market's really trading more on psychology now than fundamentals," said Matthew Eads, portfolio manager and securities analyst for Atlanta-based Eads & Heald Investment Counsel. "Investors are really looking for anything to grab on that's a sign of good news."
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Across the world, stock markets also rallied on the Treasury Department's announcement. Japan's Nikkei 225 rose 3.4 percent, or 270 points, to 8216, while Hong Kong's Hang Seng Index jumped 4.8 percent, or 614 points, to 13,447. In London, the FTSE 100 closed up 2.9 percent, or 110 points, to 3953.

U.S. stock markets have fluctuated wildly this month, hitting 12-year-lows before rallying over the past two weeks -- the first time since May that stock markets have had two consecutive positive weeks.