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View Full Version : Economics Treasury's Toxic Asset Plan Could Cost $1 Trillion


RINGLEADER
03-22-2009, 05:11 PM
WASHINGTON (AP) - The Obama administration's latest attempt to tackle the banking crisis and get loans flowing to families and businesses will create a new government entity, the Public-Private Investment Program, to help purchase as much as $1 trillion in toxic assets on banks' books.

The new effort, to be unveiled Monday, will be followed the next day with release of the administration's broad framework for overhauling the financial system to ensure that the current crisis - the worst in seven decades - is not repeated.

A key part of that regulatory framework will give the government new resolution authority to take over troubled institutions that would pose a threat to the entire financial system if they failed.

Administration officials believe this new power will save taxpayers money and avoid the type of controversy that erupted last week when insurance giant American International Group paid employees of its troubled financial products unit $165 million in bonuses even though the company had received more than $170 billion in support from the federal government.

Under the new powers being sought by the administration, the treasury secretary could only seize a firm with the agreement of the president and the Federal Reserve.

Once in the equivalent of a conservatorship, the treasury secretary would have the power to limit payments to creditors and to break contracts governing executive compensation, a power that was lacking in the AIG case.

The plan on toxic assets will use the resources of the $700 billion bank bailout fund, the Federal Reserve and the Federal Deposit Insurance Corp.

The initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price.

When Geithner released the initial outlines of the administration's overhaul of the bank rescue program on Feb. 10, the markets took a nosedive. The Dow Jones industrial average plunged by 380 points as investors expressed disappointment about a lack of details.

Christina Romer, head of the Council of Economic Advisers, said Sunday that it's important for investors to know that the administration is bringing a full array of programs to confront the problem.

"I don't think Wall Street is expecting the silver bullet," she said on CNN's "State of the Union.""This is one more piece. It's a crucial piece to get these toxic assets off, but it is just part of it and there will be more to come."

But private economists said investors may still have doubts about whether the government has adequate resources to properly fund the plan and whether private investors will be attracted to participate, especially after last week's uproar concerning the AIG bonuses, which has added to the anti-Wall Street feelings in the country.

Romer said the new toxic asset program would utilize around $100 billion from the $700 billion bailout fund, leaving the fund close to being tapped out.

Mark Zandi, an economist at Moody's Economy.com, estimated that the government will need an additional $400 billion to adequately deal with the toxic asset problem, seen by many analysts as key to finally resolving the banking crisis.

Zandi said the administration has no choice but to rely heavily on government resources because of the urgency of getting soured real estate loans and troubled asset-backed securities off the books of banks so that they can resume more normal lending to consumers and businesses.

"This is a start and we will see how far it goes, but I believe they will have to go back to Congress for more money," he said.

The Public-Private Investment Program that will be created was viewed as performing the same functions - selling bonds to finance purchases of bad assets - as a similar organization did for the Resolution Trust Corp., which was created to dispose of bad real estate assets in the savings and loan crisis of the 1980s.

According to administration and industry officials, the toxic asset program will have three major parts:

_A public-private partnership to back private investors' purchases of bad assets, with government support coming from the $700 billion bailout fund. The government would match private investors dollar for dollar and share any profits equally.

_Expansion of a recently launched Fed program that provides loans for investors to buy securities backed by consumer debt as a way to increase the availability of auto loans, student loans and credit card debt. Under Geithner's plan for the toxic assets, that $1 trillion program would be expanded to support purchases of toxic assets.

_Use of the FDIC, which insures bank deposits, to support purchases of toxic assets, tapping into this agency's expertise in closing down failed banks and disposing of bad assets.

Some industry officials said hedge funds and other big investors are likely to be more leery of accepting the government's enticements to purchase these assets, fearing tighter government restraints in such areas as executive compensation.

Administration officials, however, insisted Sunday that a distinction needed to be made between companies getting heavy support from the bailout programs and investors who are being asked to help dispose of troubled assets.

Romer said the partnership with the private sector will help ensure that the government doesn't overpay for the toxic assets that it will be purchasing.

"This isn't just another handout to banks," she said on CNN. "We very much have the taxpayers' interest in mind."

The administration's revamped program for toxic assets is the latest in a string of banking initiatives which have also included efforts to deal with mortgage foreclosures, boost lending to small businesses and unfreeze the market for many types of consumer loans.

In addition, the nation's 19 biggest banks are undergoing intensive examinations by regulators that are due to be completed by the end of April to determine whether they have sufficient capital reserves to withstand an even more severe recession. Those that do not will be able to get more support from the government.

The overhaul of financial regulation will be revealed by Geithner in testimony he is scheduled to give Tuesday and Thursday before the House Financial Services Committee.

In addition to the expanded authority to seize big institutions that pose a risk to the entire system, the administration is also expected to offer more general proposals on limiting excesses seen in executive compensation in recent years, where the rewards prodded extreme risk-taking.

The regulatory plan is also expected to include a major change that gives the Federal Reserve more powers to oversee systemic risks to the entire financial system.

The administration is working to unveil its proposed regulatory changes in advance of a meeting of the Group of 20 economic leaders, which Obama will attend on April 2 in London. European nations have complained that lax financial regulations in the United States set the stage for the current financial crisis.

http://apnews.myway.com/article/20090322/D973AFAO0.html

Jenson71
03-22-2009, 05:47 PM
This was pretty much necessary. As far as I can tell, these toxic assets need to be bought by the government before things start rolling smoothly. Yes, another trillion on top of everything is a lot, but it's better than a ten year recession.

wild1
03-22-2009, 06:03 PM
10 year recession lol

Jenson71
03-22-2009, 06:21 PM
10 year recession lol

That would be a depression, right. Yeah, I guess that was a bit extreme. I mean no industrialized country has ever gone through that recently.

BucEyedPea
03-22-2009, 06:35 PM
This was pretty much necessary. As far as I can tell, these toxic assets need to be bought by the government before things start rolling smoothly. Yes, another trillion on top of everything is a lot, but it's better than a ten year recession.

No they would have just been liquidated in the market where it should because they're worthless. Only a govt would buy worthless things. Check their record.
And it's the other way around, Obama's policies are more likely to lead to a 10 year recession. Letting the market liquidate things at worstó2 years.

SBK
03-22-2009, 08:46 PM
10 year recession lol

You've spent a lot of time studying the 1920's and 1930's huh?

RINGLEADER
03-22-2009, 09:33 PM
No they would have just been liquidated in the market where it should because they're worthless. Only a govt would buy worthless things. Check their record.
And it's the other way around, Obama's policies are more likely to lead to a 10 year recession. Letting the market liquidate things at worstó2 years.

That's the scam. They're hoping to create a speculative market for something that's worthless. Kristol made a good point this morning that a lot of the banks are solvent only by placing an inflated value on their worthless assets. And treasury is counting on the private sector coming in and setting a price that's more than zero.

I don't know why anyone would buy anything this government is peddling. Someone in the media (or on a blog) will write a story about one of the participating banks getting paid too much or giving away millions of dollars worth of incentives to stay in business and congress will tax the private sector 100% for being complicit in the ruse (despite the fact that they came up with the plan to begin with).

SBK
03-22-2009, 09:51 PM
That's the scam. They're hoping to create a speculative market for something that's worthless. Kristol made a good point this morning that a lot of the banks are solvent only by placing an inflated value on their worthless assets. And treasury is counting on the private sector coming in and setting a price that's more than zero.

I don't know why anyone would buy anything this government is peddling. Someone in the media (or on a blog) will write a story about one of the participating banks getting paid too much or giving away millions of dollars worth of incentives to stay in business and congress will tax the private sector 100% for being complicit in the ruse (despite the fact that they came up with the plan to begin with).

Bingo. :(

Direckshun
03-22-2009, 10:04 PM
As far as I understand, this is not an EXTRA trillion. It's probably an extra few hundred billion.

Much of this will be funded by what remains from TARP (by the way, this is evidence that TARP sucked ass at accomplishing what it was set out to do -- TARP was SUPPOSED TO DO THIS TO BEGIN WITH). Much of the rest will also be funded by the Reserve and FDIC. But that still leaves a large gap in the rest that probably amounts to a few hundred billion.

RINGLEADER
03-22-2009, 10:24 PM
As far as I understand, this is not an EXTRA trillion. It's probably an extra few hundred billion.

Much of this will be funded by what remains from TARP (by the way, this is evidence that TARP sucked ass at accomplishing what it was set out to do -- TARP was SUPPOSED TO DO THIS TO BEGIN WITH). Much of the rest will also be funded by the Reserve and FDIC. But that still leaves a large gap in the rest that probably amounts to a few hundred billion.

I'm not an expert, and this isn't a dig at you by any means, but from what I've read the real gap is probably closer to $10-$15 trillion. The whole exercise we're going through now seems to be to buy time in the hope that the market begins to correct and the value does increase before the bill comes due. I understand the issues of trying to inflate the economy, but this just reeks of a plan that will do little more than make a bad situation worse. Hope I'm wrong cuz there's nothing we can do about it now.

Guess we'll find out if the liberal dream of spending our way out of a recession can happen.

Direckshun
03-23-2009, 12:35 AM
I'm not an expert, and this isn't a dig at you by any means, but from what I've read the real gap is probably closer to $10-$15 trillion. The whole exercise we're going through now seems to be to buy time in the hope that the market begins to correct and the value does increase before the bill comes due. I understand the issues of trying to inflate the economy, but this just reeks of a plan that will do little more than make a bad situation worse. Hope I'm wrong cuz there's nothing we can do about it now.

Guess we'll find out if the liberal dream of spending our way out of a recession can happen.

I honestly have no clue what the real gap is. I was just refering to this particular plan.

wild1
03-23-2009, 06:23 AM
I'm not an expert, and this isn't a dig at you by any means, but from what I've read the real gap is probably closer to $10-$15 trillion. The whole exercise we're going through now seems to be to buy time in the hope that the market begins to correct and the value does increase before the bill comes due. I understand the issues of trying to inflate the economy, but this just reeks of a plan that will do little more than make a bad situation worse. Hope I'm wrong cuz there's nothing we can do about it now.

Guess we'll find out if the liberal dream of spending our way out of a recession can happen.

from what i have read, the amount he is putting us on the hook for in guarantees is enough to pay off most of the mortgages in the country

talastan
03-23-2009, 07:59 AM
This was pretty much necessary. As far as I can tell, these toxic assets need to be bought by the government before things start rolling smoothly. Yes, another trillion on top of everything is a lot, but it's better than a ten year recession.

Just like the CBC's prediction of 10 years of almost a trillion dollar deficit if Obama's budget is passed? This is stupid. No bank that is currently well capitalized enough, namely your regional and community banks, are going to be in the market for these toxic assets. Not to mention that fact that the banks are already stating their terms for participating in this program. ie: Exec bonuses, government controls, etc. Unless the fed is going to negotiate to these banks no one will buy what this government is selling. Kinda screwed the value and faith in the government when we printed another trillion out of thin air last week.

Amnorix
03-23-2009, 08:10 AM
No they would have just been liquidated in the market where it should because they're worthless. Only a govt would buy worthless things. Check their record.
And it's the other way around, Obama's policies are more likely to lead to a 10 year recession. Letting the market liquidate things at worstó2 years.

Have you ever even looked at the S&L Bailout, how it worked, and how successful it was?

banyon
03-23-2009, 08:54 AM
Have you ever even looked at the S&L Bailout, how it worked, and how successful it was?

This should be good. :fire:

RINGLEADER
03-23-2009, 09:52 AM
I honestly have no clue what the real gap is. I was just refering to this particular plan.

Fair enough.

Wall St. seems to like the idea.

Today.

RINGLEADER
03-23-2009, 09:55 AM
Have you ever even looked at the S&L Bailout, how it worked, and how successful it was?

This is definitely the model they hope is born from the plan. I would point out that the government contribution to the S&L crisis was something like $150 billion over many years as the problem was flushed out. I don't know how the government pays for the trillions of assets that are being targeted in this plan or what constraints are in place to limit the size of that pool of toxic (non)assets.

But to Obama's credit he's trying to tap down the congressional idiots who are out there doing their best to scare away the free markets that this plan is going to rely upon. So good for him, political or not.

Hydrae
03-23-2009, 10:05 AM
The regulatory plan is also expected to include a major change that gives the Federal Reserve more powers to oversee systemic risks to the entire financial system.

I mentioned this in another thread without respones. Does this not scare the crap out of people around here? How much of our governmental responsibilities are we going to sign over to this private organization? Of all the things that have been going on, this may be the scariest in my opinion and here it is buried in articles and getting no play.

eazyb81
03-23-2009, 10:10 AM
No they would have just been liquidated in the market where it should because they're worthless. Only a govt would buy worthless things. Check their record.
And it's the other way around, Obama's policies are more likely to lead to a 10 year recession. Letting the market liquidate things at worst—2 years.

Do you ever stop and think before posting? Do you even understand what is happening here?

The CDOs that are crushing the balance sheets of these banks are made up of portions of mortgages. By saying they are "worthless", you are saying your home, your neighbor's home, and every home in this country is literally worth zero dollars. That is the only way these mortgage-backed securities could be worthless, and it is an absurd and sensationalistic viewpoint.

The banks cannot continue to hold these assets on their books due to mark to market, so they will sell them at a discount to private investors who have the opportunity to hold them for a few years until the market turns around.

Yeah yeah, I know, Austrian economics...Ron Paul...Bernanke/Paulson/Geithner/Obama/Bush et al are morons, etc.

jAZ
03-23-2009, 10:14 AM
There is a difference between assets that truely have no fundamental value (worthless) and one where there is not a market for the asset at the moment.

Anyone who's ever had a garage sale or gone to a swap meet and tried to sell some niche item at fair price can relate to this.

The overall economy plays a huge role in the value of the assets. Good economy means more people who can afford their house. Bad economy means the opposite.

This plan to give loans to private parties to buy the assets is a good idea in theory. Wall Street agrees, but that might be based on the fact that some uncertainty is removed.

But the loan program here might prime the pump in establishing a meaningful market for the assets.

jAZ
03-23-2009, 10:16 AM
Do you ever stop and think before posting? Do you even understand what is happening here?

The CDOs that are crushing the balance sheets of these banks are made up of portions of mortgages. By saying they are "worthless", you are saying your home, your neighbor's home, and every home in this country is literally worth zero dollars. That is the only way these mortgage-backed securities could be worthless, and it is an absurd and sensationalistic viewpoint.

The banks cannot continue to hold these assets on their books due to mark to market, so they will sell them at a discount to private investors who have the opportunity to hold them for a few years until the market turns around.

Yeah yeah, I know, Austrian economics...Ron Paul...Bernanke/Paulson/Geithner/Obama/Bush et al are morons, etc.

This.

RINGLEADER
03-23-2009, 01:13 PM
There is a difference between assets that truely have no fundamental value (worthless) and one where there is not a market for the asset at the moment.

Anyone who's ever had a garage sale or gone to a swap meet and tried to sell some niche item at fair price can relate to this.

The overall economy plays a huge role in the value of the assets. Good economy means more people who can afford their house. Bad economy means the opposite.

This plan to give loans to private parties to buy the assets is a good idea in theory. Wall Street agrees, but that might be based on the fact that some uncertainty is removed.

But the loan program here might prime the pump in establishing a meaningful market for the assets.


Good post but I think the spread between the real value (as set by this new program) and how the banks are carrying them is still going to be fairly large (thus complicating the process). But if you're going to throw $300 billion at the problem this is probably a more effective use of it then what Hanky Panky Paulson tried.

jAZ
03-23-2009, 03:53 PM
Good post but I think the spread between the real value (as set by this new program) and how the banks are carrying them is still going to be fairly large (thus complicating the process). But if you're going to throw $300 billion at the problem this is probably a more effective use of it then what Hanky Panky Paulson tried.

This approach is an effort to keep the Government from over-paying for the assets while still getting them off the books of the banks who can't lend at a necessary rate with this much baggage on the books.

There are issues, but it looks like it makes sense. Will it be attractive enough? We'll find out.

SBK
03-23-2009, 04:46 PM
Have you ever even looked at the S&L Bailout, how it worked, and how successful it was?

This whole mess is S&L part 2. We didn't let them fail then, and now they're screwing up the whole financial sector once again. :(

BucEyedPea
03-23-2009, 05:00 PM
Originally Posted by Amnorix View Post
Have you ever even looked at the S&L Bailout, how it worked, and how successful it was?

Successful? Aren't we still paying for it?

HonestChieffan
03-23-2009, 05:05 PM
Its all a function of whos ox got gored.