Paulson’s Plan Could Reveal True Extent of the Problemby Tim Manni
Treasury Secretary Henry Paulson revealed plans today to develop a government facility that would deal with clearing bad debt. Paulson’s plan would allow financial institutions to clear bad assets off of company balance sheets. The facility would be designed to overtake bad assets, and dispose of them in an orderly fashion. “A government move to help pull bad assets off the books may be the next step,” said HSH Vice President Keith Gumbinger.
Although it may sound like another bailout, the government may be willing to take, or buy, the bad debt no investor is interested in buying. “This would prevent another Merrill Lynch situation from developing — a dumping of assets into an already glutted marketplace,” said Gumbinger. “There are simply no buyers for some assets in this market.”
Will the government buy these bad assets at a discount rate, or will they just take them? Who’s putting up the cash if the government is indeed buying bad debt?
These questions remain unanswered as the terms have not yet been structured, if even fully contemplated. If the government moves forward with this plan, it could truly reveal just how much bad debt is weighing down the current market. Since investors are currently only interested in safe bets, this facility could be crucial in restarting a healthy marketplace.