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March 23rd, 2009

Treasury Unveils Toxic-Asset Plan



Returning to the original strategy of the Troubled Asset Relief Program (TARP), a fundamental strategy still represented in the name (troubled-asset relief), the Treasury Department unveiled their latest attack on solving the issues of financial institutions. This morning Treasury Secretary Timothy Geithner detailed the Public-Private Investment Program (PPIP), designed to generate between $500 billion and $1 trillion in spending power to relieve banks of their troubled assets.

The program will pull between $75 billion and $100 billion in funding from the TARP program, as well as funding support from the FDIC, Federal Reserve, and private firms. he plan’s goal is to relieve banks of their toxic assets, which, according to the Treasury, continue to create a “financial uncertainty” for institutions — negatively affecting capital levels and lending abilities.

“The program is a sound concept, but it takes a long time,” said HSH Vice President Keith Gumbinger. As with the TALF, this program is structured to facilitate the price discovery of these toxic assets. Perhaps the reason why the Treasury scrapped this program over four months ago was because it took too long to determine the value of these assets. The Treasury has had to consider how they can value these assets while both involving the private market as well as limiting the downside.

The structure of the public-private program looks as though private investors will not have to raise very much capital in order to leverage a significant purchase. In the example provided by the Treasury, a private entity would only have to leverage $6 to obtain a $100 pool of assets.

While a main downside of the program is clearly outlined for the private investors, the upside for the taxpayers isn’t. The Treasury fact sheet warns that private investors stand “to lose their entire investment in a downside scenario,” while the program will make the most of taxpayer resources.

Despite the lack of certain details, markets have reacted well so far to Geithner’s plan, unlike his last address.

Be sure to check back in with us as we continue to analyze and dissect the Treasury’s latest initiative.

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One Response to “Treasury Unveils Toxic-Asset Plan”

  1. Jeff Says: March 24th, 2009 at 8:39 am

    I have some doubts about whether this plan will work. With all the money the government is pending, am certain in the long term will raise the debt level as well raise the likelihood of huge inflationary pressure later on. I was looking the other day, at a site,
    where it was showing the cyclicality in the economy. Maybe we should just let the cycle take its course. Just my 2 cents.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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