Sunday, March 22, 2009

U.S. Treasury Renews Focus on Purchase of Toxic Assets

Treasury Plans to Provide Loans to Buy Bad Assets, New York Times
Geithner to Unveil Toxic Asset Plan, Financial Times

On Monday, the Obama administration, specifically Treasury Secretary Timothy Geithner, will announce plans to assist U.S. banks in removing toxic assets from their balance sheets. The long-awaited plan, which was originally set to be announced much earlier in President Obama's term, is designed to purchase, either directly or through loans, up to $1 trillion of toxic assets from banks and financial institutions. Economists and industry analysts are widely anticipating the details of the plan, as the estimated $2 trillion dollars in toxic assets, including troubled mortgages and related securities, are still widely believed to be dragging down the financial sector and the U.S. economy generally.

The plan is not expected to provide for the direct government purchase of the toxic assets, but rather will likely involve making heavily subsidized, low interest loans made to institutions who purchase the assets at government-managed auctions. While the Treasury Department, under Sec. Geithner's leadership, will be the primary steering agency of the toxic asset plan, the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) will also play roles in the administration and distribution of the funds.

In addition to the potential economic impact of the new toxic asset purchase plan, it has also become very politically significant to the Obama administration, especially Sec. Geithner. Geithner and the administration have weathered days of criticism regarding the awarding of over $150 million in federal bailout money as bonuses to AIG executives and are seen by many to be depending on a warm reception of the toxic asset plan to reverse their current political fortunes.

Discussion Questions:
1. Should further public funds be invested in private corporations?
2. Is the Obama administration's toxic asset plan a good strategy to spur economic recovery?
3. Will the political impact of the plan be sufficient to alleviate criticism of Sec. Geithner?

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