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.


jstpcsofme said...

I think that by doing this they are putting off the inevitable. It would be better to go into a depression or recession now than what they are doing. We are just devaluing our dollar and creating more debt to the tax payer. As usual, the rich and irresponsible get off scott-free, which is just going to encourage more of the same bad behavior. We need prices to come out of the stratosphere. As well, we need to stop living on credit and go back to living within our means. AND-and this is a big and: let the speculators speculate with their own money and take their own risks-let them fail and lose their money-this notion that something is too big to fail is insane and nonsense-and stop bailing their butts out. Oh, well-I can dream. I don't see it happening in my lifetime, though-responsibility, that is, by those in power and wealthy beyond imagination....! I just love the idea that me, my children and probably my grandchildren have just been sold into debt-just another form of slavery.
Aura, Oregon

Life Insurance Broker said...

I sure wonder if this plan will work because if it doesn't it will be another useless step towards the "inevitable" like Aura said. It's sad to see that the only thing Mr. Obama can think of is to pump money into the economy and hope it will start somehow. But there is so many downsides to this solution. Nevertheless, I'm pretty curious about the outcome of this buyback plan.

Take care, Lorne, Toronto

Geby said...

Unlike you Tim, I don't hope the plan put forth by the administration will succeed, but neither do I hope it will fail. I just wish it would go away, because I view it as a "lose-lose" proposition. We never should lose sight of the fact that the government doesn't have any money, except what it takes out of our pockets, by raising taxes or devaluing the dollar by printing more. We lose no matter what. Given the performance of the so-called "economists" in the past two or three decades, they don't have a clue, and are putting up a front to show their "state of denial." The government can't do it all, and with this plan, the government can't do anything but hurt the taxpayer, you and me.