Monday, March 23, 2009
Wall Street loves Obama's toxic assets' buyback plan; but carefully read what he has gotten us into
The stock market is in love with President Obama's plan to buy back toxic assets of banks -- decisions these institutions made to buy up a lot of bad home loans to make a big profit.
The Dow this morning is up more than 300 points, and the price for a barrel of oil is above $53 a gallon as the dollar weakens. So we gain in one area and lose money in another as gas prices inch ever close to $2 a gallon.
I hope the plan works as the president wants to free up the capital markets to encourage lending and buying. But the plan is so complex and so intrusive into the free markets that I fear this nation is getting into a mess that will make AIG look like a good deal.
The New York Times tries to explain the program this way:
Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.
The plan calls for the government to put up most of the money for buying up troubled assets, and it would give private investors a clearly advantageous deal. In one program, the Treasury would match one-for-one every dollar of equity that private investors invest of their own money in each “Public Private Investment Fund.”
On top of that the F.D.I.C. — tapping its own credit lines with the Treasury — would lend six dollars for each dollar invested by the Treasury and private investors. If the mortgage pool turns bad and runs big losses, the private investors would be able to walk away from their F.D.I.C. loans and leave the government holding the soured mortgages and the bulk of the losses.
The Treasury Department offered this illustrative example of how the program would work: A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors would submit bids. In the example, the top bidder, an investor offering $84, would win and purchase the pool. The F.D.I.C. would guarantee loans for $72 of that purchase price. The Treasury would then invest in half the $12 equity, with funds coming from the $700 billion bailout program; the private investor would contribute the remaining $6.
One institutional investor said he was surprised that the government was lending so much of the money, saying that private investors have been willing to buy up pools of mortgage-backed securities with less “leverage” or outside borrowing than the Treasury proposed on Monday.
The true magnitude of the toxic-asset purchase program could amount to well over $1 trillion. Buried in Mr. Geithner’s announcement was the detail that the Treasury would dramatically revise and expand its joint venture with the Federal Reserve, known as the Term Asset-backed Secure Lending Facility, which was originally created to finance consumer lending and some forms of business lending.
I really pray that the President is successful with this plan. The alternative is making things worse and prolonging this recession into a depression.
These times are quite frightening.