U.S. Plan to Attract Investors for Bad Bank Assets - How Will It Work?
TREASURY WOULD INVEST UP TO $100 BILLION TO LURE PRIVATE INVESTORS TO BUY UP TO $1 TRILLION IN BANKS' "TOXIC ASSETS"!
Representing Billions and Billions of dollars in devalued assets, banks in IL and across the U.S. are holding defaulted mortgage loans as well as securities made of of these bad loans. As the U.S. Housing Market has fallen on hard times, the value of these assets has dropped considerably, making them nearly impossible to sell to investors.
Less raised capital by banks leads to less available money to provide loans to consumers and businesses. Fewer loans - less investment by small businesses, and far fewer home purchases by prospective buyers. Credit has virtually frozen in recent months, and the U.S. Economic Recession has deepened.
Coming to the rescue?
As summarized in a Chicago Tribune article by reporters Jim Puzzanghera and Walter Hamilton, the U.S. Treasury Department, under Treasury Secretary Timothy Geithner, has drawn plans to incentivize investors to purchase these pools of troubled funds. Government loans and loan guarantees would help fund this private investment, under his plan.
Without the burden of these toxic assets in their portfolios, banks could resume increased levels of lending again. However, that part of the formula would involve strictly voluntary bank participation.
Geithner's program would be coordinated by the U.S. Federal Reserve Board in conjunction with the Federal Deposit Insurance Corporation (FDIC). The Fed would provide the financial backing, while the FDIC would provide the expertise in marketing and selling off the troubled bank assets. Private investors would thus feel greater confidence in buying up the weak assets, and U.S. Taxpayers would not be left footing the whole bill.
Will it work?
Wall Street thinks so - the Dow Jones Industrial Average has gone up nearly 700 points over the last three days. Many experts predict the government backing could lure private investors into the debt market.
Two larger money management firms, Pimco of Newport Beach CA, and BlackRock Inc. of NY, have committed to participating in the program. Also, the Financial Services Round Table, an organization representing the banks with the troubled assets, as well as the Private Equity Firms who would otentially acquire them, are reacting positively.
But it will be time that will tell if this ambitious program will work, and how well it will work, to bring the U.S. Housing Market out of its over-eighteen-month nosedive.
DEAN MOSS & DEAN'S TEAM CHICAGO
