Word: plan
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Treasury Secretary Timothy Geithner has unveiled a new plan to combat the financial crisis: persuading private financial institutions to buy up toxic assets with the government's backing. While this is a step up from former Secretary Henry Paulson's original bailout plan - in which the government itself would buy up the bad securities - it is still not the right approach...
...homeowners owe less money on their mortgages, they will be less likely to stop making their payments. The plan is equivalent to a universal renegotiation of terms that improves the situation for both homeowners and banks. As a bonus, mortgage-backed - and, indeed, all mortgage-based - securities will become less toxic by virtue of a trickle-up effect...
...Experts have pointed to a $30.6 billion deal between Merrill Lynch and the Lone Star group of private-equity funds as a model for the new government plan. Lone Star purchased that amount of Merrill Lynch's portfolio of asset-backed securities, and Merrill Lynch reduced Lone Star's risk by financing three-quarters of the purchase. Therefore, Lone Star had limited risk, which is similar to the way funds would have limited risk buying bad securities with government backing. But the most important part of the deal was not Lone Star's risk; it was the price. Lone Star...
...This plan costs the government - and the U.S. taxpayer - only a trivial amount, the operating costs. Again, it is nowhere near as complex as what the government has done so far. It carries a small price tag compared with the massive, mostly ineffectual spending that has been the basis of the current policies. (See pictures of the global financial crisis...
...Implementation is the most difficult part of this proposal. While many financial institutions would immediately discount the plan, ultimately persuading them to accept it is not unreasonable. It is true that for those institutions that hold physical mortgages, their maximum potential profit will go down. For a 30% decrease in principal, the math works out to some $3 trillion potentially lost on residential mortgages as of mid-2008, according to the Federal Reserve. But if Americans keep defaulting on these mortgages and asset values continue to crash, the total loss to the financial world will be far greater than...