Word: problem
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...problem facing America's economy has always been how to sell the worst of the toxic assets that are clogging banks' balance sheets. Geithner and his aides at Treasury cleverly realized that the best approach was to offer great prices on some of the more attractive stuff and hope the garbage would move too. (See 25 people to blame for the financial crisis...
Those bad loans are a problem for banks. There are some $230 billion in loans that were overdue by 90 days or more as of Dec. 31, 2008, according to the FDIC. It's a good idea to try and get those moving off banks' books. But what of the bundled, securitized assets? According to the FDIC, the total value of securities on banks' books as of Dec. 31 was $1.7 trillion. How much of those securities are toxic and how does the Geithner plan move them to be sold...
...second part of the program, run by the Federal Reserve, attempts to get at that part of the problem by expanding an existing program. But it covers only some of the toxic securities: residential mortgage-backed securities that were initially AAA-rated but are now toxic. It doesn't cover commercial mortgage-backed securities and other asset-backed securities that are no longer AAA-rated. (See the worst business deals...
...mortgage. However, since MBS derive their value from a pool of loans - typically thousands of individual mortgages - the default of some portion of the mortgages would not mean the security had no value, only a reduced value. Unfortunately, banks, in an effort to increase their investment returns, exacerbated the problem by using enormous leverage to purchase and securitize mortgage loans. Thus, even if MBS's value declined because of defaults, because of the use of leverage, the security could still be toxic to the bank...
...Another, subtler problem can be the difference between what are known as surrogate outcomes and patient outcomes. A new drug or treatment may reliably lower cholesterol, say, or reduce the size of a tumor - these are surrogate outcomes - and the drug-maker would call that a success. But the ultimate goal of treatment isn't simply to give you lab results you can boast about, it's to make you feel better and live longer; those are the patient outcomes. Sometimes though, good surrogate outcomes don't lead to good patient outcomes. Hormone replacement therapy, for example, raises good cholesterol...