[Infowarrior] - US Unveils Toxic Assets Plan

[Richard Forno]

US Unveils Toxic Assets Plan
U.S. TREASURY, GEITHNER, RECOVERY, SPENDING, STIMULUS, BAD BANKS,  
CREDIT CRISIS, TOXIC ASSETS
CNBC.com
| 23 Mar 2009 | 08:19 AM ET

http://www.cnbc.com/id/29834595

The US Treasury Monday revealed details of a plan to set up public- 
private investment funds that will buy up to $1 trillion in troubled  
loans and securities at the heart of the financial crisis.

Initial market reaction, however, was positive. US stock futures and  
Asian share markets climbed on Monday in anticipation of the plan.  
Currencies that were sold off heavily during bouts of market  
volatility, such as the Australian dollar or sterling , also rose.

The Treasury’s complex plan to use private funds to purchase toxic  
assets uses low-cost government financing, government guarantees and  
government equity as incentives, people familiar with the matter say.

The plan has two programs--one to purchase securities, the other to  
purchase loans from banks.

The plan will launch with a $500-billion price tag, but the cost could  
reach $1 trillion, the government said. About $75 to $100 billion of  
the government funding will come from the second tranche of the TARP.

The Obama administration's latest plan comes amid a growing taxpayer  
backlash about aid to Wall Street, as well as what many consdier  
exhorbitant executive pay.

Administration offcials Monday addressed those concerns, emphasizing  
that public and prvate money was being used togteher.

"We're sharing in a partnership form," said White House economist  
Austan Goolsbee on CNBC. "If the private sector profits, then the  
government profits."

Two-Prong Approach

In the first part of the plan, the government will create around five  
separate public-private partnerships, with the government investing  
dollar for dollar along side private capital. These partnerships will  
bid for the mortgage-backed securities and other assets weighing down  
the balance sheets of the banks, creating a price through competition.

"We don't want the government to assume all the risk. We want the  
private sector to work with us," Treasury Secretary Timothy Geithner  
told Wall Street Journal in an interview.

The Federal Reserve will open up its Term Asset-Backed Securities Loan  
Facility for non-recourse funding for these purchases. Additional  
funding will be available from the TARP for these purchase.

The second part of the program uses government and private funds to  
purchase loans off the books of the banks. Under this program, the  
Federal Deposit Insurance Corp. will offer guarantees to lenders who  
finance the purchase of these assets. The government will also invest  
side-by-side with private capital in the purchases.

A bank selling the assets could be likely to finance those assets,  
with government guarantees.

Officials stressed the program is not a "silver bullet" and won’t  
solve the banking problem by itself. They said it’s part of the  
broader Financial Stability Plan, which includes a $75 billion  
foreclosure mitigation plan, the TALF, the capital access program and  
the bank stress tests.

For example, banks that sell assets to the private partnerships for  
less than the current values on their books could be required to raise  
capital. The capital access program will make that capital available  
in the form of mandatory convertible preferred that can be turned into  
common shares as needed.

Treasury spokesman Isaac Baker Saturday declined to comment until  
details of the plan are announced. Aspects of the plan, however, have  
been leaking out to various news organizations, including CNBC, over  
the past few days.

U.S. Treasury Secretary Timothy Geithner said on Sunday that help from  
the private sector was critical to get toxic assets off banks' balance  
sheets and help resolve a credit crisis.

"Our judgment is the best way to get through this is if we can work  
through the markets," Geithner said in an interview with the Wall  
Street Journal post to the Internet late Sunday. "We don't want the  
government to assume all the risk."

When he first mentioned public-private investment funds in February,  
Geithner laid out the proposal in such scant detail that markets sank  
on fears there was no clear-cut plan for rescuing a banking system  
beset by poorly performing mortgage and other assets left over from a  
housing boom that went bust.
# Wall Streeters Face Bitterness—And Shock

Geithner said the plan could soak up as much as $1 trillion of toxic  
assets, which investors would buy at a discount in hope of selling at  
a future profit, and in the process help establish a market-driven  
method for pricing such assets.

-- Reuters contributed to this article
© 2009 CNBC.com

URL: http://www.cnbc.com/id/29834595/