Toxic Bank Assets Vs. Mr. Clean

Yesterday, the words offered by Treasury secretary Timothy Geithner on the economic recovery plan in an op-ed piece that ran in most newspapers, clearly showed his vision for the recovery of the housing market within the overall economy:

… We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place.

“More credit, at lower interest rates” is a great start and the delta of this plan is the purging of the toxic bank assets.

Investors may soon be queuing up to buy some of that toxic gold of bad home loans and mortgage-related securities now that the plan's basic structure has been released by the Treasury secretary. All in all, the total buy up of real estate assets by Treasury from the banks could be as much as $2 trillion.

There were some immediate takers; “several major investment firms, including BlackRock and Pimco, said they would participate as buyers of bank asset,” the Wall Street Journal reported. CNBC reported that BlackRock was interested in investigating a mutual fund vehicle by which individuals could participate.

In a very, very simplified nutshell, here’s what’s happening with the Treasury secretary's bank plan:

"Administration officials outlined a three-part Public-Private Investment Program that offers private investors vast amounts of cheap, taxpayer-supported financing for every dollar they put up of their own money. In essence, the Treasury and the Federal Reserve will be offering at least a tablespoon of financial sugar for every teaspoon of risk that investors agree to swallow.

"But the crucial incentive for investors — traditional fund managers, hedge funds, private equity funds, pension funds and possibly even banks — is that the government would lend as much as 85 percent of the purchase price for each portfolio of mortgages.

"On top of that, the Treasury would invest one dollar of taxpayer money for every dollar of private equity capital to cover the remaining 15 percent of the portfolio’s purchase price." New York Times

The word on the street is that this could be a very profitable venture for investors and a highly risky plan for taxpayers. There are still many “ifs” and “how tos” to be worked out. Click here to read the New York Times' coverage of how the plan may work.

Below is a graphic, courtesy of the New York Times that helps show how Geithner’s program basically works. Click the image below to enlarge:

Laurence D. Fink, BlackRock’s chairman and chief executive said, “The combined impact of all the Treasury and Fed bailout programs could start to stabilize the economy sooner than many expect.

“I think right now there’s so much pessimism that no one is seeing anything beyond their nose. With all the triage from all different activities from the government, you could say that by the latter part of this year, we could start seeing the economy start restabilizing itself.”

Encouraging words.

Mr. Geithner concludes his op-ed piece with the following:

"Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so."