Word: toxicants
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When treasury secretary Tim Geithner rolled out his long-awaited plan for buying up toxic mortgage loans and securities on March 23, reaction was split. Financial markets cheered, with the Dow Jones industrial average rocketing 497 points, or 6.8%, on the day. The chattering classes mostly grumbled, with Princeton economist and New York Times columnist Paul Krugman gloomily leading the way: "It fills me with a sense of despair," he wrote of the plan before it was released but after many details had leaked...
...simple explanation for this divide is that the Geithner plan - which calls for Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation to finance the bulk of up to $1 trillion in toxic-asset purchases by private investors - is a great deal for the investors and a big risk for the taxpayers. The math calls for the government to take on most of the downside risk while evenly sharing the rewards with hedge funds, money managers and other buyers. In the loan-buying program, private investors would put up 7% of the capital for a shot at close...
...once we get to the actual buying of what Treasury is gingerly calling "legacy assets" (I'm hoping for a public-service ad campaign with the slogan "It's not toxic, it's a legacy"), things may shake out much differently from what Wall Street hopes and Krugman & Co. fear. Both sides in the debate seem to expect that the asset purchases will provide nothing but benefits to the banks that sell. That's not a safe assumption. We don't yet know what private investors will be willing to pay for those once-thought-to-be-valuable legacies. With...
...value of doing this is it would clarify which banks are and which banks aren't undercapitalized," says Harvard Law professor Lucian Bebchuk, whose September proposal for toxic-asset purchases by competing investors seems to have provided a template for Treasury's plan. "It's reasonable to expect that restarting the market for troubled assets will lead us to discover that some banks are in a healthy position and will make it absolutely clear that some banks are in an unacceptable position...
...stock market, sending the Dow Jones industrial average up nearly 500 points, the fourth best day of trading since 1933 (though many economists still had doubts about it). At least half the questions Tuesday were forward-looking, centered on the particulars of the public/private partnership plan to get toxic assets off the books of banks...