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.

Reaction to New Financial Bailout Plan and Stimulus Bill Passing bearish

Markets traded in negative waters in early morning trade, but it wasn't until details of Tim Geithner's plan for the remains of the Financial Bailout the things scampered quickly into the bear caves.  The Dow Jones finished lower by nearly 400 points (4.6%) and the S&P and Nasdaq followed with declines of 4.9% and 4.2%, respectively.

The Financial Bailout Plan, the new one of course, since the first $300Billion seems to have been vastly misplaced and mostly wasted, is one riddled with rules and regulations sure to make most on Wall Street unhappy with the prying eyes of Washington.  But maybe that's the point, because just maybe that's what is needed to restore both public and the private sector confidence.

Bank Bailout details have been written about in several news outlets today, including CNN (Link) but the overwhelming theme is better and deeper scrutiny.  In an economy where the public has little to no confidence in the health of their banking system it may be a necessary evil. Banks will undergo tests to determine how capitalized they are before, during and after they receive funds, and the Treasury will take positions in preferred shares of companies receiving these funds.

Certain conditions will have to be met by institutions receiving money, such as the provisions included to make sure Banks work with homeowners on the verge of foreclosure in an effort to keep people in homes by redrafting payment terms and a partnership with the private sector to purchase and cleanse bad assets from the books of infected financial institutions.

Luxury items are a big public sentiment play for the President and his administration.  Clearly the public doesn't want to hear headlines about executives making multi-million bonuses while banks cry for hand-me-down money.  So executive compensation and corporate luxury spending will be scrutinized and have to go through an approval process.

The whole point here it go get banks comfortable to lend again to individuals, small businesses and large corporations, with secondary objectives of keeping people in their homes if possible and restoring public outcry over excessive compensation packages.

Oh and of course the plan will likely cost far more than initially anticipated, with numbers being thrown around of near $1Trillion in provisions, but as President Barack Obama iterated in his press conference yesterday, the cost of doing nothing is that much graver.  Oh and this on the heels of the Senate approving an $830Billion Stimulus bill that will attempt to stem the rate of job losses and put men and women across America back to work on Infrastructure, Energy, Health Care and Technology projects.

The President of the United States has indeed inherited quite an economic mess and only time will tell if opening up the ever-deepening Federal Wallet will be the inflection point the country, and the world for that matter, needs to spark itself out of Recession.

The Markets have had their say today, and so far the sentiment is pessimistic.