Treasury's Toxic Assets Plan Sends Stocks Soaring

More On The Plan

Investors on Monday finally got details on the government's plan to rid the financial system of all those toxic assets still at the heart of the financial crisis. And they liked what they saw. The Dow shot up nearly 500 points, an increase of almost 7 percent.

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It's not easy to track everything that your federal bailout money is buying. But in the next few minutes, we'll get assessments of some of it. We begin with a proposal that sent stocks soaring yesterday. It's the Obama administration's plan for the government to join with private firms, and buy up those toxic assets that are threatening banks. Here's NPR's John Ydstie.

JOHN YDSTIE: Two large money management companies, BlackRock and Pimco, said they plan to participate in the public-private investment funds that would purchase the toxic assets from the banks. Bill Gross, Pimco's co-chief investment officer, says it is perhaps the first win-win-win policy to be put on the table, and he said it should be welcomed enthusiastically.

Mr. BILL GROSS (Co-chief investment officer, PIMCO): It looks like a good program to not only clear bank-balance sheets, but to give a shot to the U.S. economy.

YDSTIE: The shot to the economy would come as banks, relieved of the toxic assets, are able to start lending again. Private investors could win by putting very little money at risk, with a potential for big rewards. And taxpayers could win by not bearing 100 percent of the cost of clearing the banks of the troubled assets. The plan has two programs. One relies on private capital, along with money from the Treasury's TARP fund and loans from the Federal Reserve, to buy up mortgage-backed securities, those complicated bundles of home loans.

The other program would buy individual mortgages from the banks holding them. That program would also use private money and money from the TARP, along with loans guaranteed by the FDIC. President Obama expressed confidence in the plan during a White House meeting yesterday.

President BARACK OBAMA: We believe that this is one more element that is going to be absolutely critical in getting credit flowing again. It's not going to happen overnight. There's still great fragility in the financial systems, but we think that we are moving in the right direction.

YDSTIE: Here's how the program to buy individual loans would work. Let's says Bank of America had a pool of shaky mortgages it wanted to get rid of. It would notify the FDIC, and the FDIC would set up an auction. Private bidders, which could be other banks or individuals or even hedge funds, would bid for the assets. Let's say the winning bid was $100 million. Well, private investors would put up about 7 percent, or $7 million. The Treasury would put up an equal amount, another $7 million. The rest of the purchase could be financed by loans that would be guaranteed by the FDIC. Those loans would cover about 85 percent of the purchase price. Now, let's say the partnerships sold the assets later for a profit. The government and the private investors would share equally in that profit, even though the government risked much more money. If there were losses, the private investor and the government would share in the losses, up to about 15 percent. Beyond that, all the losses would be absorbed by the government. PIMCO's Bill Gross acknowledges that the downside risks for the private investors are not as large as the government's risk. But nevertheless, he says, they're very real.

Mr. GROSS: It's true that the government is putting up 85 cents on the dollar, and that the private investor is putting up perhaps 5 to 15 percent. But that entire portion is at risk.

YDSTIE: So, investors could lose all the money they put up. Though the potential losses for taxpayers are even larger under the plan, Treasury Secretary Timothy Geithner said yesterday on CNBC that it's better than the other options.

Secretary TIMOTHY GEITHNER (Department of Treasury): The alternative approaches, which are the government buying all this stuff, taking on all the risk, would be much more expensive to the taxpayer. The alternative of letting it just sit there, let these assets just sit on the balance sheets of banks, would risk creating a much longer, deeper recession.

YDSTIE: Critics of the plan, including Nobel Prize-winning economist Paul Krugman, say banks may unload some toxic assets, but the plan won't solve the nation's financial woes.

Mr. PAUL KRUGMAN (Economist, Nobel Prize Winner): Sure, you know, we'll get some deals. This is a pretty sweet deal for the investors involved, but it's not going to resolve the problems with our banks.

YDSTIE: Krugman says the real problems with the nation's banks can't be solved by giving them a little more for their toxic assets than the market has been willing to pay up to now.

John Ydstie, NPR News, Washington.

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