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April 9th, 2009

Plan: Taxpayers To Benefit from Toxic Assets



The government is developing its latest strategy to rid the nation’s top banks of their toxic assets. Just as Americans were advised to buy Liberty Bonds to supports troops in WWI, everyone from individual taxpayers to large investment firms could be encouraged to contribute to the rescue of the country’s banks through bailout funds:

The idea is that these investments, akin to mutual funds that buy stocks and bonds, would give ordinary Americans a chance to profit from the bailouts that are being financed by their tax dollars. But there is another, deeply political motivation as well: to quiet accusations that all of these giant bailouts will benefit only Wall Street plutocrats.

The funds, the thinking goes, would buy troubled mortgage securities from banks, enabling the lenders to make the loans that are needed to rekindle the economy. Many of the loans that back these securities were made during the subprime era. If all goes well, the funds will eventually sell the investments at a profit.

Of course no investment is without of potential risks. A major concern among analysts is that no one knows the “true” price of these toxic assets. Once investors are in place, if the toxic assets aren’t worth as much as officials predicted, there stands to be significant room for losses. Moreover, the government is asking the American people, many of whom will be recovering their losses from investment portfolios for many years to come, to contribute their hard-earned money towards saving institutions that may have squandered their own investments in the first place.

But supporters see the opportunity in a different light:

“It’s giving the guy on Main Street an equal seat at the table next to the big guys,” [Steven A. Baffico, an executive at BlackRock] said.

The Treasury Department hasn’t yet produced an estimate for how much cash they hope to raise from taxpayer participation. If the plan works, it has the potential to patch up the previous contempt many taxpayers held against Washington’s continued defense of Wall Street. If it doesn’t, the financial relationship between the two could fall into serious jeopardy.

If the program, which is still under discussion, does move forward, participation could begin as soon as May.

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Tim Manni

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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