Legacy Loans Program Will Rescue Toxic Assets

The Obama administration released details of its latest plan to solve the massive, debilitating banking crisis which continues to hold the financial system in its crushing grip. The Treasury Dept. The plan consists of buying up the toxic assets through

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The Obama administration released details of its latest plan to solve the massive, debilitating banking crisis which continues to hold the financial system in its crushing grip. The Treasury Dept. The plan consists of buying up the toxic assets through a combination of $100 billion in TARP funds and private investment.

The Public Private Partnership Investment Program is designed to boost the current efforts which have been largely unsuccessful in unfreezing the credit markets and promoting consumer lending, rendering a “financial system is still working against economic recovery,” the Treasury says in a statement.

The Treasury’s response involves using up to $100 billion in funds from the $700 billion financial rescue plan passed in 2008 in addition to capital from private investors to generate an estimated $500 billion to purchase the toxic assets, a number that could double to $1 trillion over time, the Treasury said.

The official title of the program is the Legacy Loans program, the process through which the Treasury and private investment will purchase the toxic assets. Banks will determine which loans they would like to sell, and the FDIC will subsequently determine the amount of funding that it can guarantee for the loans.

The pools of loans will then be auctioned to the highest bidder, who will have access to the Public-Private Investment Program to fund 50% of the equity requirement of their purchase.

The Treasury will manage its investment, and will provide 50% of the equity capital for each fund. However, private managers will remain in control of the asset management, albeit subject to oversight from the Federal Deposit Insurance Corporation.

“The Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns,” says Treasury.

“Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing.”

L.D.

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