Treasury Plan For Buying Toxic Assets Is Complex Beyond Belief

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If The Wall Street Journal’s description of the Treasury’s plan to get toxic assets off of bank balance sheets is correct, it may be the most complex set of programs in the history of the federal government.

According to the paper, “the framework, designed to expand existing programs and create new ones, relies heavily on participation from private-sector investors.”

The question which will remain unanswered for some time is whether hedge funds and other pools of private money will risk being partners with the US government in programs designed to help the banks improve their balance sheets.

The taxpayers’ exposure of these programs is significant for two reasons. The first is that the government will, in many cases, provide loans to private capital firms so that they can buy toxic assets. These will be “non-recourse” loans. If the value of the assets being purchased falls sharply, the government absorbs most of the losses beyond what private capital firms have invested to buy them.

The other potential problem is that private capital firms will have to negotiate with banks for the prices to buy toxic assets. If two parties cannot agree on price, what happens? The troubled paper could remain on bank balance sheets, which defeats that purpose of the entire set of programs, or, the government can “bridge” the difference by offering to offset the amount between what banks will take for toxic paper and what private equity will pay for them. That puts taxpayers at greater risk for losses. Since the taxpayer has become the lender of last resort for the entire financial and credit system bailout, that should come as no surprise.

Douglas A. McIntyre