Details For Toxic Asset Plan On The Way The Obama administration has developed a detailed plan for removing toxic mortgage-backed securities from the nation's banks and financial institutions and may unveil it early next week.
NPR logo

Details For Toxic Asset Plan On The Way

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript
Details For Toxic Asset Plan On The Way

Details For Toxic Asset Plan On The Way

  • Download
  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
  • Transcript


From NPR News, this is WEEKEND EDITION. I'm Liane Hansen. Scott Simon has the day off today.

A plan to purge the nation's financial system of toxic assets could be announced by Treasury Secretary Timothy Geithner early next week. The effort would rely on the Federal Reserve and the Federal Deposit Insurance Corporation, rather than on additional funding from Congress. Favorable terms would be offered by the government to entice private investors to buy up troubled loans.

NPR's John Ydstie has been following this story, and he joins us. John, what do you know about the plan?

JOHN YDSTIE: Well, the plan aims to combine public and private money to buy up somewhere in the neighborhood of a trillion dollars in toxic assets - the assets that are weighing down the nation's banks and keeping them from lending. But though there's private participation, the vast bulk of the money involved would be low-interest loans from the government.

The plan is basically a three-legged stool. One leg would involve the Treasury hiring management groups - four or five of them - to buy up these toxic assets. A second leg would involve the FDIC, which would also set up special- purpose investment partnerships with private parties to buy the assets, with the FDIC adding the vast majority of the financing. And the third would involve using something calling the TALF, the Term Asset-Backed Secure-Lending Facility -how's that for a name - a giant lending program run by the Fed and the Treasury that's already making loans for credit-card financing and consumers and car loans. It would also make loans backing purchases of toxic assets, which are largely those subprime mortgage-backed securities that are at the heart of our problem.

HANSEN: So essentially, it's a public-private partnership. What are the risks, then, to the taxpayers?

YDSTIE: Well, as I understand it right now, the vast majority of the money being put up would be public. Private investors might put up as little as 3 percent equity in some of these partnerships. The Treasury would add more equity from the TARP funds it got from Congress - you know, the $700 billion, which is now down to 300 billion after all the injections of capital into the banks.

So the private investors don't have a lot of skin in the game. And the purchases of the assets would be further financed by these low-interest loans from the Fed or the FDIC. Those are likely to be called non-recourse loans, which means that the toxic assets lose money after they're purchased. The private investors would lose only the 3 percent of money they put down, or maybe 10 percent, if they invested that much, and the government would lose the rest. So the taxpayers are on the hook.

But if the toxic assets rise in value, there's the prospect of big gains for private investors. Now, some people suggest the downside to taxpayers may be small because these toxic assets are undervalued right now and are unlikely to fall much further but have a bigger chance of increasing in value. We'll just have to see.

HANSEN: Will there be any congressional involvement?

YDSTIE: Well, actually, that's the beauty of this plan for the administration right now. There would be no congressional involvement. The Treasury would be using money it already has from the original TARP, and that's a good thing because the Congress is in no mood to hand out more money to bail out banks after the huge blow-up over AIG bonuses this past week.

Also, the money from the Fed and the FDIC can be used without congressional approval.

HANSEN: So with no skin in the game, what are the chances the private investors will partner up with the government to buy these assets?

YDSTIE: Well, you know, that could be a problem. Private investors are worried about what's happened in the past few days, about the Congress's reaction to the AIG bonuses and this retroactive taxation of them. And these private investors in banks have expressed concern that if they participate in any government plan right now, the government might decide some time in the future to change the rules, and they don't like that.

In this plan right now, as I understand it, there are no compensation restrictions. So - but private parties are nervous about this.

HANSEN: Treasury Secretary Geithner and Fed Chairman Ben Bernanke are up on Capitol Hill before the Financial Service Committee Tuesday, and chances are they're going to get some questions about the AIG bonuses. What do you think's going to happen?

YDSTIE: Well, yeah. I think they're going to get a lot of questions, some heated questions. And I think we'll probably see a little finger-pointing, maybe, you know, Secretary Geithner and Bernanke sitting at the table pointing fingers directly at each other. You know how people do that when they're giving the blame?

Secretary Geithner has said he only found out about these bonuses last week and was outraged, which strains credulity a little since he was involved in the original rescue operation in his old job as president of the New York Federal Reserve - though last week, AIG CEO Edward Liddy acknowledged that the first conversation he'd had with Geithner on the bonuses was early last week. But Congress is certainly going to be mad about it.

HANSEN: NPR's John Ydstie. John, thank you very much.

YDSTIE: You're very welcome, Liane.

Copyright © 2009 NPR. All rights reserved. Visit our website terms of use and permissions pages at for further information.

NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.