Investors May Need Incentives To Buy Toxic Assets Many major banks are still crippled by bad investments on their books. Treasury Secretary Timothy Geithner says he wants to set up an investment fund to buy up a lot of those toxic assets. Details aren't clear, but it appears Treasury wants to use public money to entice private investors to buy up those problematic assets.
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Investors May Need Incentives To Buy Toxic Assets

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Investors May Need Incentives To Buy Toxic Assets

Investors May Need Incentives To Buy Toxic Assets

Investors May Need Incentives To Buy Toxic Assets

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  • <iframe src="https://www.npr.org/player/embed/100553851/100553819" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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Many major banks are still crippled by bad investments on their books. Treasury Secretary Timothy Geithner says he wants to set up an investment fund to buy up a lot of those toxic assets. Details aren't clear, but it appears Treasury wants to use public money to entice private investors to buy up those problematic assets.

RENEE MONTAGNE, host:

One part of the Treasury Secretary's new approach would bring in private investors to help save the banks. NPR's Chris Arnold has more on that.

CHRIS ARNOLD: Many major banks are still crippled by bad investments that they have on their books. A lot of these are linked to all those crazy mortgages that got written in recent years where millions of people got into loans that they can't pay. Treasury Secretary Geithner says he wants to set up an investment fund to buy up a lot of those toxic assets.

Secretary TIMOTHY GEITHNER (Department of Treasury): By providing the financing that private markets cannot now provide, this will help start a market for the real estate-related assets that are at the center of this financial crisis.

ARNOLD: The details are still very fuzzy, but Geithner seems to want to use public money to entice private investors to put up money of their own to buy up these problematic assets.

Sec. GEITHNER: We're exploring a range of different structures and will seek input from the public as we design this program. But we believe this program should ultimately provide up to $1 trillion in financing capacity.

ARNOLD: Just how much of that trillion dollars the government would be on the hook for is a key question. The plan is sort of a new spin on what's been called a bad bank - that is basically a fund that buys up a lot of bad assets to get them off the bank's balance sheets. But here the private sector would help finance the effort.

Mr. MICHAEL LEVAS (Head, Olympian Partners): The government can't pay for everything.

ARNOLD: Michael Levas heads up a hedge fund named Olympian Partners. He says he'll take a look at the deal the government's offering when it comes out.

Mr. LEVAS: I think they're trying to make a cohesive effort in attracting the private investor community into this situation so that they can help. And I think that's what they need to do. I don't think that the government can just do this on their own.

ARNOLD: Right now, investors who might buy these assets are bidding extremely low prices. Levas says part of what's going on is that investors are afraid to buy, say, some securities linked to troubled mortgages because they can't turn around and sell them to anybody else.

I mean, that's part of the problem, there's no market. If you buy something right now you can't sell it.

Mr. LEVAS: That's exactly right. There is no market. I mean, it's just been really unbelievable. The liquidity in the market for this type of stuff has been really, really absolutely horrid, and that's what they really need to address.

ARNOLD: So, how does the government get the private sector to come in and get things moving again here when it's so far been unwilling to do that?

Mr. LEVAS: They're going to have to put some kind of caveat here to make it attractive, whether it's a guarantee, whether it's an ability to walk away.

ARNOLD: The government might loan a lot of money to investors. So, let's say a private investor put in $10 million to buy troubled assets, the government could loan them, say, another 20 million to buy more. That would magnify the investors' profits if they made money. But if investors really overpaid for the assets and had big losses, the government, it would seem, could lose a lot of money here.

Mr. SIMON JOHNSON (Economist, MIT): Wall Street owns the upside and the taxpayer owns the downside.

ARNOLD: Simon Johnson is an economist at MIT who runs the blog Base Line Scenario: Tracking the Financial Crisis.

Mr. JOHNSON: Think of it like this: you may not want to go to Las Vegas because you think the odds are tilted against you. But if your dad says, look, I'll give you a big loan, you go and gamble, and if things go well, you get to keep the upside, and if things go badly you don't have to pay back the loan or you don't have to pay back the full amount of the loan. That might be good for Las Vegas. I don't think that's going to be a good value proposition for the taxpayer.

ARNOLD: Now, here's something that confused a lot of people. In his testimony before lawmakers, Geithner actually said he wasn't envisioning the need for guarantees to protect investors, which seems to suggest that he wouldn't let people gamble with the government's money. But that's the whole point of this idea. The market isn't working by itself now - people don't want to buy these toxic assets at almost any price, so…

Professor JONATHAN MACEY (Law, Yale University): You got to do something to induce them to buy the assets. The government's going to have to provide something like a guarantee.

ARNOLD: Jonathan Macey is a law professor at Yale University who studies financial markets.

Prof. MACEY: And that's why there's so much frustration - is it a government guarantee or is it not? If it isn't, then what's the point? If it is, how much are we on the hook for?

ARNOLD: Macey doesn't like the idea of the government spending a lot of money on this particular intervention anyway. But like a lot of other people, he's eagerly awaiting more details.

Chris Arnold, NPR News.

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Q&A: U.S. Lays Groundwork For New Bank Rescue

Treasury Secretary Timothy Geithner on Tuesday outlined an ambitious and potentially very expensive program to revive the financial system. It could put up to $2 trillion into the economy.

Here, a look at some of the key issues the government hopes to address with its rescue plan.

What's in part two of the bank rescue plan?

Geithner said bold action is needed because "the financial system is working against recovery, and that's the dangerous dynamic we need to change." Getting credit moving again is essential, he said. In its absence, "economies cannot grow."

Some of the administration's proposals are quite specific — there will be significantly more government financing available — up to $1 trillion — to jump-start the frozen loan markets for small businesses, consumer and auto loans. But other parts of the plan — like what to do with those toxic assets paralyzing the banks — are very vague. And those toxic assets remain at the heart of the banking crisis.

Are banks getting more bailout money in this phase of the rescue plan?

Banks will be eligible for additional capital through stock purchases by the federal government. But Geithner said banks will be put through a "stress test" in order to qualify for assistance. The test would determine whether banks have enough capital to make loans and cope with losses if the economy continues to deteriorate. They wouldn't be able to keep the money on the sidelines. They would be required to cap executive compensation at $500,000; dividend payments to shareholders would be curtailed.

What about those toxic assets?

They aren't getting off bank balance sheets anytime soon. Geithner described a public-private partnership in which private investors would purchase those hard-to-value assets with some government financing. But he provided no details about how those assets would be priced, the extent of federal involvement or who the private investors might be.

Geithner says, and rightly so, that these assets — many of them tied to mortgages — present a tremendous challenge to the government and the financial system. They're causing banks to absorb enormous losses. And there's no functioning private market in which they can be sold. Some economists want the government to acquire those assets through a so-called bad bank. But the Obama administration has rejected that approach. The reason? If the government pays too much, taxpayers bear the brunt. If the government pays too little, then the banks don't get the capital they need.

So Geithner is hoping that the lure of government financing will bring private investors out of the woodwork. Theoretically, those investors would be able to determine a market price for assets like mortgage-backed securities and taxpayer risk would be limited. But there was nothing in Tuesday's proposal that provides a road map of how that will be achieved.

What's the price tag of round two?

The government could finance up to $2 trillion in the effort to shore up lending and deal with those toxic assets. Geithner said the ultimate cost to taxpayers won't approach that "headline number." For example, that $2 trillion figure takes into account participation by both the private and public sectors. And some or perhaps even most of the credit extended to banks and other borrowers would ultimately be repaid. Still, Geithner acknowledged "the strategy will cost money, it will involve risk and take time."

How about the housing crisis and the foreclosure mess?

The government is committing $50 billion to stop the flood of foreclosures. Monthly payments would be reduced for qualifying middle-income homeowners. The government is preparing a much more detailed plan that will be released in a few weeks. Geithner didn't offer any real specifics Tuesday.

How did the market react to Geithner's speech?

Not so well. The Dow fell more than 150 points after he spoke. Presumably, it was the lack of specifics in several parts of the plan that disappointed investors.