U.S. Dep’t of Treasury Unveils Details of Toxic Asset Plan

Sources: Washington Post, Treasury Unveils Details of Plan to Relieve Banks of Toxic Assets; CNN.com, Dow Jumps Almost 500 Points

Treasury Secretary Timothy Geithner unveiled details of the Obama Administration’s plan to clean up toxic assets in the financial system—the long-awaited and politically risky “Public Private Investment Plan” (PPIP). The announcement sent the stock market skyward on Monday, with the Dow gaining 500 points at its biggest one-day point gain since October 2008.

To get troubled assets off of banks’ books, the government and private investors will invest between $500 billion and $1 trillion in buying real-estate-related loans and securities from banks, using $100 billion from the Troubled Assets Relief Program, the Bush Administration’s program to rescue the nation’s failing institutions. The idea is that once the assets are off their books, banks will resume lending and the credit freeze that has crippled world economies will start to thaw. The government and private investors will hold those assets long-term and will be on the hook should the assets lose value (and stand to gain if those assets appreciate in value).
President Obama said that while the financial system is still very fragile, he believes “we are moving in the right direction.” He also commented that the PPIP will position the Treasury more appropriately to lay regulatory groundwork to prevent another crisis of this magnitude. Geithner admitted that the government is taking a huge risk with this plan but underscored that it is better than the alternatives and that “you can’t solve a financial crisis without the government taking on risk.” Treasury officials are banking on the theory that toxic assets’ values have been driven so low due to excessive fear—and not reasonable beliefs in how the economy will actually perform. The hope is that new purchases of those troubled assets will kick-start the markets to functional normally again.

The PPIP has been carefully crafted to serve three diverse goals: giving private investors plenty of incentive to buy the distressed assets, getting banks to willingly sell these assets and protecting taxpayers from unreasonable risk. Private investors could end up putting only 7% of the purchase price down with government contributions and private lenders (who will receive government guarantees). Private investors could receive up to 50% of potential profits—a stance that Treasury officials say will give government and private investors equal stakes, and more of a “we’re all in this together” feeling about the plan.

Some believe that the Treasury is giving up too much to private investors—that if the plan works, it could be very profitable and the government will not have enough of a stake to get the windfall that taxpayers deserve. Banks are concerned about the program, too—mainly that their troubled assets are worth more than current market prices and that they would be forced to incur losses on those assets if they are forced to sell now.

Questions for Discussion:

Do you think the plan will work? Reflecting on past “radical” government actions whose goals were to bring the U.S. out of recessions and depressions—such as FDR’s nearly socialist programs in the 1930s—do you think this controversial plan will bring calm and stability back to the financial markets?