The Toxic Asset Plan: Treasury Announces “Public-Private” Scheme to Deal With Banks’ Problems

From the New York Times:

The success or failure of the plan carries not only enormous stakes for the nation’s recovery but certain political risks for Mr. Geithner as well. At least two Republican senators have called for his resignation. And on Sunday, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, told Fox News that “if he keeps going down this road, I think that he won’t last long.” Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.

From Reuters:

While Treasury, in company with private investors, will put up initial financing, the Federal Deposit Insurance Corp and the Federal Reserve will be tapped to offer further financing.

Under one component of the plan, Treasury will provide up to 80 percent of the initial capital, which would go alongside investment by private funds. The FDIC would then offer debt financing for up to six times the pooled amount.

A separate component will have the Federal Reserve widen the financing it now provides under its new Term Asset-Backed Securities Loan Facility, or TALF. That $200 billion program, will be bumped up to $1 trillion and will begin accepting older mortgage-related and other securities as loan collateral.

From the Wall Street Journal:

The coordinated effort of the Treasury, Federal Reserve and Federal Deposit Insurance Corp. will attempt to address the issue of “legacy” real-estate-related assets that Treasury Secretary Timothy Geithner said is reducing banks’ willingness to take risks and to lend money to consumers.

“This will help banks clean up their balance sheets and make it easier for them to raise private capital,” Mr. Geithner said.

The plan calls for the federal government to work with private investors to try to restart the market for the troubled mortgage loans and securities, which in turn officials hope improves the financial condition of banks that have received billions in capital injections from the government already. The federal government will pair as much as $100 billion with private capital to generate $500 billion in purchasing power to buy the assets, and Mr. Geithner told reporters the plan could reach $1 trillion in size over time.