The Treasury Department has announced details of its plan to buy $500 billion to $1 trillion in so-called "toxic assets'' from banks and other financial companies, through partnerships with private investors.
The Treasury Department will use $75 billion to $100 billion from the $700 billion Troubled Asset Relief Program to finance the government's investment in pools of distressed real estate loans, mortgage-backed securities and other assets, according to an overview posted on the agency's web site.
It refers to them by a more benign name -- legacy assets
The plan is built around three main principles: Maximizing the impact of taxpayer dollars, sharing the risk and profits with private-sector partners, and using market competition to establish asset prices.
Here's how the program would work: A bank that wants to sell loans can approach the Federal Deposit Insurance Corp. The FDIC decides whether to create an investment pool around the assets. If so, it auctions the pool and forms a public-private partnership with the winning bidder.
The plan relies on leverage. The Treasury Department offered an example using a 6-to-1 debt to equity ratio. In its example, a pool of assets with a face value of $100 sold at auction for $84. In that scenario, the FDIC would provide financing guarantees for $72, leaving $12 of equity. The Treasury Department would provide half of the equity funding, or $6, as would the private investor.
The private investor would be responsible for the servicing and disposition of the loan pool, using asset managers approved and overseen by the FDIC.
The mechanism for mortgage-backed securities is different. The Treasury Department says it will approve as many as five asset managers with a track record for purchasing such assets. They can then seek money from private investors, with the Treasury Department providing matching equity for every dollar raised.
The asset managers can get additional debt financing for an amount equal to 50 percent of the total equity in the fund. The Treasury Department said that, in some cases, it might provide amounts up to 100 percent of the equity, adding even more purchasing power. The asset managers will have full discretion over the investment decisions of the funds, although the Treasury Department said it expects that they will largely adhere to a long term, buy and hold strategy.
published March 23, 2009, 1 Comments
Every major Wall Street scandal in the past decade has followed a single modus operandi: the use of alter-ego entities and sham deals to hide assets and liabilities.
That's what's going to happen here, and I have not seen any attention paid to who, exactly, will be selling these toxic assets. As structured, the Geithner plan creates an enormous incentive for current holders of toxic assets (i.e., all of Wall Street) to set up new vehicles (or reuse existing vehicles currently insolvent or operating at a loss) to serve as nominal buyers of these assets at an inflated, government-subsidized price.
That amounts to an instant subsidy to Wall Street, no different than if you were permitted to use someone else's money to "buy" at your own garage sale. After that, some "buyers" are going to make a profit, while most will simply be an acceptable loss as part of the bigger scheme.
That's what needs to be followed: who, exactly, is selling these assets and to whom? Themselves?
I have described this situation a little more depth at my own blog,
http://www.litigationandtrial.com/2009/03/articles/series/special-comment/how-to-commit-financial-fraud-gollum-and-the-treasurys-new-public-private-partnership/
or
http://is.gd/oIHv