President Obama and his administration doesn’t want to nationalize our banks so they have unveiled a plan to remove toxic assets from banks’ books in hopes that the plan will breathe life into our financial system so that the government doesn’t have to take them over.
The plan is to finance up to $1 trillion in purchases of illiquid real-estate assets, using $75 billion to $100 billion of the Treasury’s remaining bank-rescue funds. The Public-Private Investment Program will also rely on Federal Reserve financing and FDIC debt guarantees. Doing this will allow banks to clean up their balance sheets and free up the money they were loaned under the TARP so that money can start flowing again and help resurrect our economy.
The government is taking a risk but we cannot solve a financial crisis of this magnitude without the government assuming some risk. It may take months for us to see if this is a successful approach since the government, private sector and banks have to collaborate to make this plan work. Private asset managers have to be selected (in May), private investors have to participate and banks have to commit to sell their downgraded investments. The point of the program is to save the taxpayers’ money by attracting private capital. The private sector will invest alongside the American taxpayer on an equal basis, so both parties share the downside risk and upside potential. There is a great risk/reward potential here.
The second thing needed for this plan to work is strict oversight by Secretary Geithner. The Secretary has to keenly oversee what the banks are doing to ensure that bank executives continuously do the right things to get our economy back on track. We have already seen that bank executives are confused, oblivious and disconnected from the reality of what they have done to our economy. Geithner needs to keep them focused.
Fifty percent of the Treasury’s funds will go to a “Legacy Loans Program” that will be overseen by the FDIC. The Treasury will provide half of the capital going to purchase a pool of loans from banks, with private fund managers putting up the rest. The FDIC will then guarantee financing for the investors — up to a maximum of six times the capital or equity provided.
The FDIC — which has extensive experience disposing of devalued loans from taking over failed banks — will hold auctions for the pools of loans, which will be controlled and managed by the private investors with oversight by the FDIC.
Geithner is expecting a wide range of investors to participate in the Legacy Loans Program, including insurance companies, pension funds and even individual investors.
The other fifty percent of the Treasury’s contribution will go to the “Legacy Securities Program.” The objective of this initiative is to generate prices for securities backed by mortgages that are no longer traded because investors have little confidence in the principal value of the home loans.
Under this program, the Fed will expand an existing feature that provides financing for investor purchases of asset-backed securities. The Term Asset-Backed Securities Loan Program will be broadened to take on assets such as residential mortgage-backed securities that were originally rated AAA and sold by private banks.
The Treasury will also approve as many as five asset managers “with a demonstrated track record of purchasing legacy assets” that will buy the securities.
The managers will be given time to raise private capital and receive matching funds from the Treasury. Geithner is hoping that the private sector will compete to be partners with the government.
There is some fear by investors that if they do well by participating in this program the government will tax them at 90 percent or busloads of people might turn up at their doors.
I don’t think that will happen, if this works and the market is on an upswing and everyone is making money populist views will change and these private investors will be hailed as heroes.
A few weeks ago we were all in fear that banks would fail en masse. If banks had failed en masse, then massive business failures would have followed and massive unemployment would have been the result and that would have led to more foreclosures, and more bank failures and more business failures and more foreclosures and this vicious cycle would not have ended until there was a complete collapse of our economic system.
President Obama stopped the economic free-fall and we have to recognize that and give him credit for it.
There is more than one way to skin a cat so all of us will not agree 100 percent on this plan, but we have a plan and we must now give this trillion dollar plan the chance to work.
As Warren Buffet said, we’re in an economic war and we have to start acting like it. Democrats and Republicans alike have to put aside ideological differences and realize that our economy is under attack by our competitors and we have to band together since we are all in this together.
If you are an American and you don’t want to see President Obama succeed then it’s time for you to give up your citizenship and move to another country — seriously.
We’re all Americans.
United we stand, divided we fall.
Let’s pray for success!