by Chana Joffe-Walt

WHAT: The Treasury's plan to buy toxic assets from bank, help the banks and open up credit markets. The goal here is to lure investors into partnering with the government and buying up to $1 trillion in toxic assets.

THE PROBLEM: The banks have all these toxic assets they want to get rid. The banks don't want to sell those assets at fire sale prices. Fire sale prices are all that anyone is willing to pay at the moment. So the banks continue to face billion dollar losses and the toxic waste continues to mess up the flow of credit.

WHO: This plan would use the resources of the Treasury, the Federal Reserve and the FDIC (the agency that insures our bank deposits) to make this appeal to investors: help us take us buy these toxic assets and we'll meet you more than halfway. We will match your investment and then we will offer you a cheap loan. Then we will guarantee that loan.

The government hopes with these subsidies private investors will love buying up toxic assets.

 

SAY WHAT? I find examples helpful. Here's one from the Treasury:

Sample Investment Under the Legacy Securities Program
Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.
Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.
Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.
Step 4: The fund manager commences the sales process for the investment fund and is able to raise $100 of private capital for the fund. Treasury provides $100 equity co-investment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.
Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.
Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is

WHAT COULD GO WRONG: Well, the whole Private-Public Partnership won't get any partners:

—The banks won't sell for less than what they have on their books
— Investors won't bite. They will be too worried that government will mess with their bonuses, their investments or just generally get in their way.

WHAT COULD GO RIGHT: Investors will partner and the plan will clear the junk off the books of the banks for a fair price. The credit markets start working again. The toxic assets turn out to be worth what they were sold for. The taxpayers make a little money or lose a little money, but don't suffer any big losses.