Toxic Assets: Promise, But Also Peril
"It appears we are about to have served upon us (finally!) the plan from
Treasury to "cleanse" the banking system of "toxic assets"."
A new article by Karl from market ticker. I’ll post the gist of the plan:
The plan, which has been eagerly awaited by jittery investors,
includes creating an entity, backed by the Federal Deposit Insurance
Corp., to purchase and hold loans. In addition, the Treasury Department
intends to expand a Federal Reserve facility to include older,
so-called "legacy" assets. Currently, the program, known as the Term
Asset-Backed Securities Loan Facility, or TALF, was set up to buy newly
issued securities backing all manner of consumer and small-business
loans. But some of the most toxic assets are securities created in 2005
and 2006, which the TALF will now be able to absorb.
Finally, the government is moving ahead with plans, sketched out by
Treasury Secretary Timothy Geithner last month, to establish
public-private investment funds to purchase mortgage-backed and other
securities. These funds would be run by private investment managers but
be financed with a combination of private money and capital from the
government, which would share in any profit or loss.
To target troubled securities, such as mortgage-backed securities,
the government will create several investment funds. Treasury will act
as a co-investor, in most cases contributing $1 for every $1
contributed by the private sector and sharing in the first-loss
To target troubled loans, the government will create a Disposition
Finance Program with the FDIC. In that case, the government will be a
co-investor, but could also agree in some cases to contribute 80% of
the financing, with the government putting up $4 for every $1 in
private financing. As part of that program, the FDIC would provide
guarantees against losses on a pool of loans that a bank wants to sell.
The program could guarantee as much as $500 billion in loan investments.
I am having a hard time following the numbers but Karl seems to think it will work. Just not sure what (if successful) this plan would actually do. Would it stop the collapse hyperinflation/deflation scenario or would the GDP have to somehow still grow in the face of continued falling housing prices and a second wave of defaults?