Geithner's toxic-assets plan: Markets up

by Jim Puzzanghera

The Obama administration today formally unveiled details of its long-awaited plan to help cleanse banks and financial institutions of bad home loans and toxic securities, making a calculated gamble that partnering with private investors to buy the assets will stabilize the crisis while limiting the risk to taxpayers.

The plan, introduced by Treasury Secretary Timothy Geithner at an early morning news conference, would use between $75 billion and $100 billion in federal financial rescue money to lure private investors to join with the government to buy up to $1 trillion in bad sub-prime mortgages, mortgage-backed securities and other troubled assets that are dragging down the balance sheets of financial institutions.

Geithner said the new Public-Private Investment Program would allow the government to share with private investors both the risks of acquiring the bad assets and the potential gains if they are bought at low-enough prices. That innovative idea was selected as a better alternative than having the government buy up all the assets itself or simply allowing banks to work through the problems on their own.

"The alternative strategies would have the government either taking on all that risk ourselves, having all those losses on our balance sheet, or sitting back and let this process of de-leveraging continue to weigh on the American economy, pushing viable businesses closer to the edge," Geithner said.

The final details are still being developed and the Treasury Department hopes to launch the program within the coming weeks, in participation with the Federal Deposit Insurance Corp. But Wall Street reacted positively to the announcement, with the Dow up about 290 points in early trading.

See the rest of the breaking report on Geithner's toxc-assets plan today at Tribune Web-sites and here in the Swamp:

The program targets two groups of assets that are at the heart of the financial crisis - bad mortgage loans being held by banks and securities containing those loans that are held by banks and other financial institutions. The values of those assets have plummeted with the collapse of the housing market, making them almost impossible to sell.

That dynamic has dragged down the value of financial institutions and made it extremely difficult for them to raise the money to provide new loans. The resulting credit crunch has pushed the financial system into crisis, deepening the recession.

Geithner's plan involves using government loans and guarantees to lure investors to buy the assets at discounted prices.

For example, a bank with a pool of residential mortgages that had a value of $1 million could place those up for sale under the program. Private-sector firms would bid to buy the loans in conjunction with the government, weighing the potential gain of holding on to them for several years.

If the highest bid were $840,000, the FDIC would guarantee $720,000 of that, leaving $120,000 to be raised. The Treasury Department then would provide half of the $120,000, with the private investors providing the other half. The private investors would manage the pool of assets.

The government and private investors would share in the profits when the assets are sold at a later date.

"A principle virtue of this mechanism is to use the financial interests of investors to help set the price. Because they have money at risk, they're going to make better judgments about how to set the price for these assets than the government could hope to make," Geithner said. "We have seen and I expect to see a lot of interest from the private sector."

Firms that participate in the program will not be subject to executive compensation restrictions, unless they are banks that already have received federal bailout money, Geithner said. The plan will get started using the approximately $270 billion left in the $700-billion financial rescue fund created last fall.

Geithner said the administration hoped that would be enough money, but Obama has included in his 2010 budget a potential request for an additional $750 billion.

The administration understands the anger over the recent retention bonuses awarded to employees of bailed-out American International Group and more broadly at the financial institutions that helped cause the crisis by making risky investments, he said. For that reason, the program is designed to limit the risk to taxpayers of cleaning up those assets, while also trying to lure private investors to help participate in the clean up.

"That anger and outrage is perfectly understandable, and if we're going to get through this we have to engender more confidence in the American people that we're going to use taxpayer money effectively and wisely, to help get credit flowing again, help reduce borrowing costs, and we want to make sure our assistance is not going to reward failure, to benefit people that got us into this mess, and that is critically important," he said. "But as the president said, we also need to make it clear that our actions need to be guided by the basic objective of doing what is necessary to help get recovery back more quickly."