Government to Buy Up Banks Toxics Assets
In Washington this week the Obama administration outline a bank buy out plan involving billions of dollars in soured loans. Industry officials say they will try to remove at least a trillion dollars from banks ledgers. Secretary of the Treasury Timothy Geithner announced the official details may be out by the first of the week. Administration insiders say the recent scandal over million dollar AIG bonuses for executive employees has soured prospects for future bailout money from the government. One aspect of Geithner’s plan would rely on the FDIC to aid the government’s $789 billion Recovery Act. The FDIC would create special partnerships with investors to buy up bad debt. Exact numbers were not given.
Another aspect of the as-yet-unannounced plan is to be a public-private partnership for investing in bad assets. In other words, the government would match 100% dollar for dollar any private investment, and share profits equally as well.
A third leg of the plan would involve the Term Asset-Backed Securities Loan Facility, or TALF, leveraging $100 billion from the Buyout Fund to support $1 trillion in Fed loans. Economists speculate that the key to success is speed. How quickly can the government get the toxic assets off of the banks backs? The sooner the banks have lending room, the sooner the system will get moving in the right direction. One concern about Geithner’s plan is that analysts worry that not enough is being done, or that the market becomes underwhelmed. For example, in February after Geithner’s announcement of the rescue overhaul, due to the lack of details the Dow plunged downward almost 380 points.
The market is waiting for a unique signal that the administration is finally tackling the problems the previous administration had been unable to resolve. And the main point of Geithner’s plan of attack is to rid the banks of mountains of bad loans and soured mortgage-back securities. This has been perceived as a failure for the Recovery and bailout program, that these toxic assets are not going away.
There have been a lot of political fallout against Wall Street, and some industry officials have expressed concern about the government changing the terms or imposing new regulations that harm the private sector.
This plan is just the latest in the government’s attempt to tackle the economic crises, other programs have included covering the back log of mortgage foreclosures; loosening up the markets that support credit card debt, student loans, and auto debt.