A trillion here, a trillion there. Pretty soon, we’re talking
about real money. Treasury Secretary Geithner will unveil his plan to
rid banks of their toxic assets today. And it’s expected to cost
another $1 trillion dollars.
I’m sure we’re all thrilled to learn that we’ll get yet another
new government agency. It’s called the Public-Private Investment
Program. It’s charged with removing up to $1 trillion in toxic assets
from banks’ balance sheets.
This agency is already conducting “stress tests” for banks. It
will have the power to place weak banks into “conservatorship” in order
to clear out the bad debt. Conservatorship sounds like a fancy way of
saying nationalization, but maybe that’s just me. The Public-Private
Investment Program will also offer low-interest loans to private
investors, like hedge funds, to purchase the toxic assets.
Of course, it’s a major assumption that anyone will want loans to
buy toxic assets, even though there appears to be some demand for these
assets now, at the right price. Problem is, banks don’t want to let
them go at fire-sale prices because they think they might one day
recover some value.
And what if private investors buy the assets and they don’t
recover in price? I can only guess that they’ll default on their loans
from the Treasury.
Economists seem to think that this is an important step for the
Treasury to take. At least now there’s a focus on the lending market
instead of bailing out companies like AIG. But I can’t help but think
even more of our tax dollars are being put at risk.
*****It will be interesting to see how the stock market reacts to
this news, especially as it comes right on the heels of Bernanke’s
announcement that the Fed will be buying Treasury and corporate bonds
and consumer debt.
I expected the Fed’s announcement to be well-received. And it was,
as stocks jumped immediately following the FOMC last Wednesday. I’m not
so sure about Geithner’s plan.
That’s because Congress just set a dangerous precedent when it
passed a bill that will tax compensation at AIG last week. While this
new law might appease angry voters, it’s also changing the rules after
the fact. Don’t be surprised if private investors are hesitant to work
with the Public-Private Investment Program. Because now there’s the
threat that, if they make too much money, Congress might change the
terms of their deals.
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That’s it for today. I’ll talk to you tomorrow.
03-23-2009 11:54 AM