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Toxic asset plan not as Rosy as Obama administration makes it out to be:



March 23, 2009 – Comments (2) | RELATED TICKERS: FAZ , FAS , C

Geithner in the hot seat on toxic assetsEamon Javers Eamon Javers – 1 hr 36 mins ago

Treasury Secretary Timothy Geithner faced a barrage of questions Monday about a new bank bailout plan to buy up to $1 trillion in so-called “toxic assets,” but defended the effort, saying, “Our job is to fix the problem in the financial sector at the least risk to the taxpayer."

He also acknowledged the intense public anger over the sense that Wall Street is benefiting from the bailouts even as average Americans suffer: "That anger and outrage is perfectly understandable," he said. "We have to make sure our assistance is not going to reward failure."

Geithner announced a plan Monday that would use $75 billion to $100 billion in taxpayer dollars from the initial Wall Street bailout, plus money from private investors, to generate $500 billion to buy up the assets from troubled banks. That amount could increase to $1 trillion over time. Those are mainly mortgage-backed securities whose value has cratered, but they remain on bank balance sheets and are blocking further lending.

The administration is facing resistance from the potential buyers and sellers in the new program, as well as criticism from the left that the proposal is a rehash of old Bush Administration ideas. Geithner deflected criticism that his proposal didn't go far enough. "We are the United States of America. We are not Sweden. We have a very complicated financial system," he said.

Geithner’s plan got an early and important endorsement from The Financial Services Roundtable, a trade group for the nation’s largest financial institutions. The group said the plan will help fix a value on the damaged securities, give flexibility to potential buyers and provide enough government-backed financing to make the plan work.

“Combined with other on-going efforts, the plan will help strengthen the economy,” the Roundtable said in a statement immediately after Geithner’s announcement.

Wall Street also signaled it support, with the Dow up nearly 300 points as of 11 a.m. Monday.

 A lot was riding on Geithner’s announcement – both the fiscal health of the nation’s crippled banking system, but also Geithner’s own reputation. He’s been battered by a series of missteps that have left some Republicans calling for his resignation, even as President Barack Obama is standing solidly behind him.

The administration signaled that it understood the high stakes around Monday’s announcement for Geithner – sending him out brief reporters without cameras rolling, in a so-called “pen and pad” briefing.
The absence of television crews seemed to help Geithner, who has been criticized for his sometimes-awkward on-camera delivery. The absence of most of the politically minded White House television correspondents allowed the technically minded print reporters to dominate the question and answer session, and kept to detailed terrain on which Geithner seems most comfortable. He was not asked about the questions surrounding his own performance.

In fact, Geithner did not seem to be a man whose job is on the line. Although the White House has been forced to issue repeated statements of support for Giethner, the Treasury Secretary appeared confident, spoke without a prepared script, and fielded detailed technical questions.

Geithner’s plan is similar to an idea that was originally the foundation of the initial Wall Street bailout, proposed by former Treasury Secretary Hank Paulson. But then Paulson shifted course after the legislation was passed and used the money instead to provide funding directly to the struggling banks.

Geithner emphasized that the plan he announced today is the best of several bad options. He said the alternatives would be to either; do nothing, which could result in a depression, or for the government to simply buy up the toxic assets directly, which he said would leave the taxpayer with dramatically more risk than his proposal.

Geithner said he believes that financial institutions will do a better job of setting a price for the toxic assets than the government could do, largely because they will have their own money at risk. And he said that he believes there will be buyers for the assets – even though sellers have not been able to unload them for months. “We’ve seen a lot of interest from the private sector,” he said, cautioning that there would be criticism from potential buyers that the government was not taking on enough risk. He described the financing structure this way: “A dollar of capital from Treasury, alongside a dollar of capital from private investors, financing from government on top of that. For that financing to be at risk, the private investor has to lose all its equity.”

Ahead of the announcement, potential sellers of the so-called toxic assets, generally the large banks that are already participating in the government's TARP program, complained that they hadn't been given enough notice of the program in advance last week. One financial services executive said on Sunday that banks still hadn't gotten an explanation of why they ought to participate in the program as of late last week, leaving very little time to digest the details before its public unveiling.

Potential buyers of the assets, largely hedge funds, worried that Washington' intense focus on executive pay could turn on their own enormous earnings, or that Congress could change the terms of the deal after the fact, as it tried to do when the House approved a 90 percent tax on bonuses, spurred on by public outrage over AIG’s $165 million in bonus payouts.

2 Comments – Post Your Own

#1) On March 23, 2009 at 2:14 PM, IBDvalueinvestin (98.32) wrote:

The people that will benefit the most are not necessarily the banks but those firms buying the assets. Why, because the government will be assuming majority of the risk.

Firms like BX,  RJF, BLK, WDR, STT

Thats why you see big gains in these stocks today, because they will be getting Christmas presents from the Government in Early this year.

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#2) On March 28, 2009 at 6:48 PM, byroninhouston (< 20) wrote:

Everyone acts as though the only problem a family has in facing foreclosure is the mortgage on their home.  Before most people ever get behind on their home loan they have already trashed their credit cards and ability to qualify for a loan.  Keeping them in a home with judgements from credit cards which will not go away in bankruptcy is not doing the debtors any favors.  The credit card companies will get judgements for that debt and take any equity the home owner may build up in the future.  We would be a lot better served by having the home foreclosed on and then giving the debtor $30,000 to go put down on anew home.

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