23 March, 2009

US Treasury unveils details of bad-asset plan

It is almost a certainty that no one has been under as much scrutiny in recent weeks as Tim Geithner, but the Head of the US Treasury, with the complete backing of the Obama administration has finally unveiled a much talked about plan to rid banks of the toxic assets that plague their balance sheets. The sheer numbers are completely alarming, with the plan aiming to finance as much as $1Trillion in terrible and illiquid real-estate assets.

Between the lines however, is a well-thought out and highly detailed set of procedures, rules, guarantees and TARP money usages to allow both, the government to recoup taxpayers money and private investors to prosper in an economic and housing rebound. Using $75-$100Billion of bank bailout money the Treasury is setting up the Public-Private Investment Program, allowing private investment vehicles to purchase specific toxic assets from the books of major financial institutions.

The plan aims to do 2 things: Relieve structurally (for the most part) sound banks of the crippling illiquid assets and spur private investment in order to push forward an agenda of market participation and economic recovery. Banks with cleaner balance sheets will be able to invest and lend again, rely on core business to produce profits, and regain some much needed confidence across Wall Street and Main Street. Private investors, with government partnership, will be able to own these assets, with specific guarantees, in an effort to turn them into prosperous investments in the future.

Part 1: The Treasury as a mediator. The Treasury is not simple acting as a mediator in allowing private investors to talk to banks about purchasing assets, that much could've been done completely without the US government. What it is doing, The Treasury that is, is setting up a Legacy Loans Program to help facilitate the private investor-bank transactions. The FDIC (Federal Deposit Insurance Corp) will oversee this program and will guarantee, up to 6 times, financing for investors.

Part 2: The Treasury as a market-maker. The Legacy Securities Program portion of the unveiled plan will allow The Treasury to act as a market-maker for securities that have become so illiquid they are not longer actively traded. How do you sell a depressed asset if no one knows what it is worth and no one knows how they can buy it? This part of the plan aims to answer those specific questions.

So far, markets have responded very positively to the details of the plan, at mid-day the majors in the US were all higher by 4% (led by the financial sector up almost 7%), but only time will tell if this plan will work. Due to the nature of private investment, and the facilitation needed to create markets for illiquid securities the process will take time. So far though, in the early going, Traders are applauding the government's move to make private investors partners with the government in investing in these assets, and not simply making the taxpayer foot another bill to clean up balance sheets.

And for those psychological investors out there, the S&P has cracked 800 today.

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