Toxic Assets Plan, Take 2: Will Geithner get it right this time?

Treasury Secretary-designate Timothy Geithner in November 2008
Treasury Secretary-designate Timothy Geithner in November 2008 Charles Dharapak / AP

WASHNGTON — After a disastrous first attempt, the Treasury Department is poised to announce Monday details of its plan to help get so-called toxic assets off of the balance sheets of the nation's largest and often most troubled financial institutions.

Treasury Secretary Timothy Geithner will meet with reporters shortly before the 9:30 a.m. opening bell for trading on the New York Stock Exchange. He'll outline the public-private partnership that he only discussed in broad strokes on Feb. 10, sending financial markets into a dive across the globe because of a lack of long-awaited detail.

Geithner is expected to announce a plan in which Treasury will use $75-100 billion from last year's $700 billion Wall Street bailout. This money from the Troubled Asset Relief Program, commonly called TARP, will be used as seed money to partner with the private sector.

Together, the government and private sector players will team up to purchase the pools of mortgages, called mortgage-backed securities, that are the root of the nation's deep economic problems. Banks have been forced to write down the value of these assets quarter after quarter, because there are no buyers for them.

Without buyers for securities, banks have been unwilling to lend, even though mortgage rates are at levels that are very low by historical standards.

"This is starting a market for these assets where there is none," said an administration official, speaking on the condition of anonymity in order to speak freely.

Under the public-private partnership, an auction process will be established for the purchase of these assets, with the help of the Federal Reserve and the Federal Deposit Insurance Corp. The Fed will provide a facility for financing purchases of securities, while the FDIC will help finance the purchase of loans off of bank balance sheets.

To date, banks have been unwilling to sell these distressed assets at fire-sale prices and investors have been unwilling to purchase them unless they are at a discount much steeper than banks have been willing to accept.

"This plan has a good chance of success; certainly much better than the plan Treasury put forward six weeks ago," said Mark Zandi, chief economist at Moody's, a forecaster in West Chester, Pa. "This plan relies much less on private investors and much more on direct government purchases of banks' troubled assets. Only a handful or so of private investors need to participate in this plan to establish workable auctions for the assets and thus determine a fair price for the assets."

Pricing of these assets remains the stumbling block, and is why former Treasury Secretary Henry Paulson pivoted away from purchasing troubled assets as first envisioned under the Wall Street rescue plan last October. The idea behind the Geithner plan is to establish some preliminary pricing. If the market begins to revive, the administration is likely to seek more funds to help it grow.

"The government can then come in and buy these assets on a large scale at these prices. (Roughly) $1 trillion is not enough; it probably needs to be twice that," said Zandi. "But if the plan works well enough, I think Congress will provide more money to solve the problem once and for all. This plan makes me more optimistic about the financial prospects for the financial system and the economy."

The plan for toxic assets is the last, and most vital link, of the Obama administration's broad financial rescue program. Under this broad program, all federal banking regulators have started stress tests on the nation's 19 largest banks to determine if they have sufficient capital to survive an even deeper recession than the one now on pace to be the longest since the Great Depression. By the end of April, these banks, if deemed insufficiently capitalized, will have to raise capital in the private sector within six months or get cash from the government. In that case, taxpayers would get a stake in the bank.

Since Feb. 10, Treasury has rolled out a number of incentives for players in the housing sector to help refinance or modify distressed mortgages. Treasury and the Federal Reserve have jointly put into place a program to have the Fed purchase bundles of credit card debt, student loans, car loans and small-business loans in hopes of sparking lending in the troubled economy.


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