WASHINGTON — In March, Treasury Secretary Timothy Geithner unveiled a Public-Private Investment Program in which the government and private firms would bid together to purchase toxic assets from banks, freeing them to increase lending and help revive the economy.
The program's still not operating.
"We're committed to getting it done, and expect to have it very, very soon," said Andrew Williams, a Treasury spokesman. "It's complicated and takes time."
Until the banking sector fully recovers, experts warn, the economy will face a long slog back.
"I don't see that we've put in place the foundations for a durable recovery. The freefall is over, and that allows some of the positives to show . . . but that doesn't mean that 2010 is a lock for expansion," said Vince Reinhart, a former top economist at the Federal Reserve.
Banks too cautious to increase lending and end the credit crunch remain part of the problem.
"We haven't fixed the financial system. The firms at the center of the global trading system don't have enough capital, they're not supporting markets," he said.
Banks are certainly better off than they were last fall, when the global financial system teetered near collapse. Recent "stress tests" by federal regulators showed that many of the nation's largest banks are stronger than thought, and able to raise capital.
Those results, however, only showed that banks can be profitable despite the potential losses on their books, cautioned Reinhart, who's now a scholar at the American Enterprise Institute, a conservative research organization.
"That doesn't mean banks are recapitalized and ready to go," he said, noting that the so-called toxic assets remain. Those assets remain liabilities to banks, inhibiting new lending, lest the banks end up with more liabilities than they can carry.
The Bush administration decided in October to pump money directly into banks to ensure their solvency. Since then, home prices have further eroded nationwide, making it harder to value the mortgage-backed assets clogging bank balance sheets.
Geithner is expected to announce this week the names of asset managers he's decided to let participate in government-backed auctions of these troubled bank assets. Initial bold estimates of up to $1 trillion in asset purchases, however, have been scaled back to between $20 billion and $50 billion.
Even that's questionable because banks may not want to part with assets voluntarily if they find the auction bids too low. Banks think that the assets have value, but until the housing market stabilizes, it's difficult to price them.
"The banks are finding that if they raise enough capital they can hang on to those assets," said Bert Ely, a banking consultant. Banks are trying grow their way out of their toxic-asset problem, but that takes time, and meanwhile the economy remains in the doldrums.
Banks don't want to give the assets away at, say, a dime per dollar of their face value — which is roughly what the bidders hope to achieve. The bidders are private-equity firms looking for outsized returns on investments.
"In order to get those high rates of return . . . they have to buy those financial assets at a substantial discount, and it's more of a discount than banks are willing to accept," Ely said.
So the status quo remains: banks with bad assets, a Treasury program to fix it that isn't operational and isn't expected to yield much once it is, and an economy stuck in quicksand in part because of it.
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