The US Treasury on Monday unveiled a plan to buy up toxic assets clogging the financial system using government funds and Federal Reserve backing to attract private capital.
The cornerstone of the plan is a "Public-Private Investment Program for Legacy Assets" funded with 75 to 100 billion dollars from the government, which officials said would "generate 500 billion dollars in purchasing power" and could expand to one trillion dollars,
The plan, the outlines of which were unveiled last month, is a key to helping the ailing banking system recover from massive losses suffered in the US real estate meltdown.
The Treasury said the plan "ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns."
A Treasury statement said, "This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly.
"Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience," it said.
"But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases -- along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets."
The statement said that "a broad array of investors are expected to participate" in the program including of individual investors, pension plans, insurance companies and other long-term investors.
The Treasury and private capital will provide equity financing and the Federal Deposit Insurance Corp. will provide a guarantee for debt financing, which wil be used to buy up mortgages and mortgage securities that are frozen because of massive losses linked to the US housing meltdown.
The Treasury will provide 50 percent of the equity capital for each of two funds, but private managers "will retain control of asset management subject to rigorous oversight from the FDIC."
To start the process, banks will decide which assets -- usually a pool of loans -- they would like to sell and the FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee.
The assets will be auctioned to the highest bidder, with the investors able to borrow funds to finance the purchase.
Treasury Secretary Timothy Geithner announced the broad outlines of the plan last month.
Yet analysts have been skeptical about whether these assets can be priced and sold under current market conditions, and whether banks holding them would be willing to sell at a deep discount, forcing a loss to be recognized.
The purchase of these assets was the original purpose of the 700-billion-dollar Troubled Asset Relief Program passed by Congress last year, but which backed away from this idea.
Robert Brusca at FAO Economics said a number of questions remain about how the toxic assets would be priced and added "the stakes are high for Geithner as he seeks to convince investors he has a viable plan to get credit flowing again."
