Private money could finance 'bad bank'
The idea of the government creating a 'bad bank' to buy up toxic assets faces a major hurdle -- how to finance it. To solve the problem, the government may partner with the private sector to get the bad stuff off the banks' balance sheets. Nancy Marshall Genzer reports.
U.S. Treasury Secretary Tim Geithner discusses the Troubled Assets Relief Program at the Treasury Department (Win McNamee/Getty Images)
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TEXT OF STORY
KAI RYSSDAL: The president's push on the stimulus plan, including tonight's press conference, means Treasury Secretary Timothy Geithner had to slide his big announcement till tomorrow. Geithner is set to outline how the government's going to spend the second half of the $700 billion bank bailout, the TARP it's called. The administration is expected to set up something like a bad bank, or what's called an aggregator sometimes. It would store or aggregator all the shaky debt that's caught up in the subprime mess. Early word is that the government's going to try to partner with the private sector to do it. Marketplace's Nancy Marshall Genzer reports.
NANCY MARSHALL GENZER: Remember what you learned in kindgergarten? You make a mess, you clean it up. The Obama administration is applying that to Wall Street -- with a twist.
University of Chicago finance professor Douglas Diamond says here the help would come from the government. It appears Treasury would give private investors some government guarantees. These investors could include hedge funds and insurance companies. They've stayed on the sidelines because they're afraid of buying too early, missing a fire sale. Diamond says the government will tell the investors, "If you pay a lot more now than you would have later, we'll help you out."DOUGLAS DIAMOND: You clean it up, and if it gets too messy, the teacher will help you out here.
DOUGLAS DIAMOND: If it's 25 percent off, too bad for you. But if it's 50 percent off, we give you a partial reimbursement.
In return, the government is asking the private sector to value those pesky subprime securities.
Robert Barbera is chief economist at brokerage firm ITG. He says the government can't value these assets. There are too many variations. It's like ice cream.
ROBERT BARBERA: There's lots of flavors. You've got sprinkles. You have people who have spent their lives looking at this stuff. And, you know, you're going to have to enlist them to help you sort through the various flavors.
But Bill Black says that help would come at too steep a price. Black teaches economics and law at the University of Missouri. He says the government would be taking on too much risk by cushioning private investments.
BILL BLACK: The taxpayers are being played for a chump.
But that's exactly why the government wants the private sector to buy most of the troubled assets.
In Washington, I'm Nancy Marshall Genzer for Marketplace.
Comments
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02/10/2009
So, the banks that made bad lending decisions get bailed out by the taxpayers, yet those particular tax payers who have the bad loan over their head do not get the bailout instead, and thus get a bad credit rating or worse, bankrupcy the Bush Administration changed before this bubble burst.
If we are willing to bail out bad banks--and they truly are, THE bad bank here, and will use the bailout money the same way they did before, to make more bad loans--why aren't we willing to keep people in houses? That helps local taxes get paid so small businesses don't get an additional tax burden, durable goods get purchased to help the economy and jobs, and people take an interest in their neighborhoods when they stay, which helps keep property values from dropping.
From sterling hgts, MI, 02/09/2009
If individuals took on too much debt, what about the government's never ending wars sinking us into debt. Trillions too. Maybe soon we won't have a country worth protecting.
02/09/2009
In summary, Banks are looking for free lunch or more accurately feast at the cost of tax payers. Why would private capital buy bad assets at higher prices? Private capital would like to buy "bad assets" at dirt cheap which is not good for banks.
From Los Angeles, CA, 02/09/2009
Why is a reverse auction not in the conversation anymore to get rid of these bad assets? I believe this solves the problem of the taxpayer paying too much and the banks receiving too little.
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