Toxic Assets and TARP, Together Again

Give Tim Geithner credit for his latest shot at fixing the banking system: At least the name is getting more sophisticated.

Six months after Treasury and the Fed rushed through the original $700 billion "Troubled Asset Relief Program" to buy up "toxic assets" held on bank balance sheets, they continue to linger in stagnant, unpriceable pools around the global financial system's backwaters. Today we get new details on the latest plan to fix the problem, but the ideas don't seem to have changed much from the original.

Replace "toxic assets" with "legacy assets" and the TARP with the Public-Private Investment Program (PPIP!), and the Treasury Department is essentially repeating the plan it had back when the crisis started, namely buying (or in this case finding buyers for) those toxic loans based on subprime mortgages and other risky assets.

The price? The total public-private partnership starts at $500 billion, and could eventually hit a trillion dollars. The risk? That buyers won't fall in line following the uproar over executive compensation and the AIG bonus tax.

The plan won't be comforting for Americans angry over the (necessarily) cozy relationship between Washington and Wall Street right now. It's ripe for concessions to the financial sector. FDIC guarantees and reports that PPIP investors won't be subject to punitive compensation rules are sweeteners. Essentially, the government has to make these assets attractive and then coerce investors to step up. Unfortunately, it has to do so without much leverage to negotiate the best deal for taxpayers. As White House economist Christina Romer said on "Fox News Sunday," buyers of these assets are "kind of doing us a favor."

So this plan isn't perfect, but it is so far the only meaningful road map we have for solving the single largest problem facing the banking sector. It can't be repeated enough: "Toxic" or "legacy" or whatever name you want to give the darker corners of our banking system have to be valued before lending can resume in a way that will support an economic recovery. Whether the government actually understands the risks it's taking on as a junior partner to banks, hedge funds and the private equity industry is another question altogether.

Geithner's WSJ Op-Ed on the plan is here.

Comments

[Dave Wrixon:]

>It can't be repeated enough: "Toxic" or "legacy" or whatever name you want to give the darker corners of our banking system have to be valued before lending can resume in a way that will support an economic recovery. <

The problem is they have to be valued at a level which makes the banks look as though they solvent whether they are actually worth anything or not. This is financial engineer/creative accounting at its finest. The problem is the only sucker that is likely to buy any of this crap is the tax payer, and then only if one takes great care not to explain the implication to him.

Mar 23 05:48 PM

[Ishortyou:]

those crap that you mentioned is called "BONDS" backed up by almost every mixed of credit or debt, the majority of them backed by the housing market, the removal of those bonds from the financials is a must to kill the uncertainty in their balance sheets and stop them from writing down nonstop, with that you cure their balance sheets, now the next step is to kill the oversupply in housing coming from foreclosures, new starts, resales, etc., once this is corrected the value of those bonds will stabilize and we can go from there. I would whine about tax payer money being wasted in social programs to lazy that doesnt want to work and live like parasites.

Mar 23 06:07 PM

[whidbey:]

Toxic" or "legacy" or whatever name you want to give the darker corners of our banking system have to be valued before lending.

They could not value the assets before, but they can now? Why? Will the costs and benefits are shifted. The taxpayer steps in if you buy too high, and he benefit if you buy too low. But the important part is that the risk of playing is cut 75% (risk declines). How cozy. And if Mrs. Romer tells you anything, go check it out. At UC B she is the poster girl for integration, not brains.

Mar 23 09:32 PM

[Mark Bern:]

There really is not problem in valuing the toxic assets. The problem is that there are two prices: one is the price the banks want ( and need to stay solvent) and the other the price is the one that investors are willing to pay for them. Unfortunately, there is a wide gap between these two prices that cannot be bridged by a mere $1 trillion that the Treasury hopes to raise, even when only $30 billion comes from private investors and the rest from the government.

The toxic assets will need to be removed to stablize the financial industry, true. But I suspect that in the end, we are heading for a pre-packaged bankruptcy solution for the most insolvent financial institutions and additional government aid to those that can be salvaged.

Mar 23 10:31 PM

[Fighting Yoda:]

A plan that is dissed by Krugman, Galbraith, Stiglitz, etc. cannot be good.

This plan is just another bailout of the insolvent banks; it is nothing but smoke and mirrors. Banks will shift the toxic (not legacy) assets out of their balance sheets to the tax payer. This plan despite the hoax of private participation – it funded 93% by FDIC and Treasury –the tax payers. This simply is a public plan.

This whole thing would be disaster, no price discovery nothing. Politically connected cronies like PIMCO, Goldman, etc would benefit, all of us would be left holding the baby.

Mar 24 02:04 AM