Obama's $1 Trillion Plan to End Bank Crisis
The Treasury Secretary Hopes to Attract Private Investors to Buy Toxic Assets
By MATTHEW JAFFE and JAKE TAPPER
March 23, 2009—
Treasury Secretary Timothy Geithner announced today a much-anticipated plan that could cost up to $1 trillion in public and private funds which the president hopes will play a key role in ending the nation's banking crisis.
The plan aims to remove so-called toxic assets -- many of them bad mortgage investments -- from the banks' balance sheets through a private-public partnership. The program will rely heavily on private investors, such as hedge funds and private-equity firms, to buy up $500 billion to $1 trillion of assets with the government providing incentives such as low interest loans and sharing in both the risk and possible profits.
"The point of the program is to save the taxpayers money by attracting private capital," a senior administration official said.
With the bad assets off their balance sheets, banks would be expected to start lending again.
The $1 trillion Public-Private Investment Program is Obama's latest attempt to pull the economy out of its dive, but it's not the last. On Tuesday, the administration wil lay out its plans to increase its regulation of Wall Street to ensure that the current crisis is not repeated.
Click Here for the Latest Business Stories From ABC News
The administration needs to address two problems. First, banks are not lending because their balance sheets are weighed down by these deteriorating toxic assets. Second, the assets are tough to price because of currently depressed pricing levels.
To solve these problems, the treasury's plan is guided by a program with three general principles.
Using the Federal Reserve System and the Federal Deposit Insurance Corp., the government will leverage private capital by co-investing with the private sector. If the private sector has financing provided by the government, buying these assets becomes a more attractive option.
Second, the administration wants the market, not the government, to set the price for these assets.
"The greatest waste of taxpayer dollars would be us paying too much," an official said.
No Silver Bullet
Third, the private sector will invest alongside the taxpayer on an equal basis, so both parties share the downside risk and upside potential.
To accomplish this, the treasury will partner with the FDIC in a program where banks can bring assets they want to sell to the FDIC. The FDIC will provide leverage, then the assets will be sold in the market, where private market participants will bid on them, thereby setting the price. Then the government can co-invest with the private sector to buy pools of toxic assets and clean up the banks' balance sheets.
To address toxic securities, the treasury will partner with the Fed in a program building on an existing lending program. The Fed will provide leverage for private sector participants to buy securities.
"This is not something that shields the private sector from risk," a senior administration official said. "If they do well, we will do well. If we do poorly, they will do poorly as well. So it avoids what's been so wrong in the past where you've had, as the president has said, 'Heads I win. Tails the taxpayer loses.'"
"We have seen and I expect to see a lot of interest from the private sector," Geithner said in announcing the program, although he said the private investors will try to take on "more risk or a greater share of the losses."
"But I think you're going to see a fair amount of interest in this," Geithner said.
Some investors though might shy away, concerned about a populist revolt.
"There is a fear that if you do well off this, they are going to come after you," said Charles Biderman, CEO of TrimTabs Investment Research, which provides data to investors including many hedge funds. "I wouldn't want to participate with this. I don't want busloads of people coming to my house."
But Joel L. Naroff, president of Naroff Economic Advisors and chief economist for TD Bank, said that investors will participate.
"The question is: how much can they wring from the government to insulate themselves from this," Naroff said. "I don't think they are going to be tarred and feathered if they get involved in a partnership with the government and they make money off of it."
Besides, such profits wouldn't be seen for several years.
"If they are making money off it, it means that the market has moved forward, it means things are getting better and people's focus of attention will have changed," Noraoff said.
The administration emphasizes that there is no "silver bullet" to solve this problem.
"This is a large problem that is going to take a long time to solve," a senior administration official said.
"We're attempting to coax a multitrillion-dollar market back to life in an extremely difficult economic and market environment and that's going to take time," the senior official said.
Today's detailed plan comes a month after the Obama administration first announced it would try to take the toxic assets off the banks' books. But the timing might be difficult.
The public has grown weary of multibillion-dollar bailout after bailout, especially when learning about executives still buying private jets and receiving large bonuses. Last week, the nation learned that some executives at insurance giant AIG had gotten a total of $165 million in bonuses after the company gave received more than $170 billion in government bailouts to remain in business.
And today, ABC News revealed that JP Morgan is spending tens of millions on new corporate jets as well as a plush new hangar for its aircraft.
At the same time, government efforts to rein in such bonuses have made some banks and investors wary of doing business with the government.
Obama Says Some Assets "Completely Worthless"
Obama made the case for today's massive program during his appearance Sunday on "60 Minutes" when he argued that it's necessary to team up with Wall Street because there are "systemic risks" in the economy.
"There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them," he told "60 Minutes."
Still, there is the problem of how to value these "toxic assets" and Obama suggested on "60 Minutes" that some of them may be "completely worthless." Nevertheless, the banks holding them expect to sell them.
"The banks are going to be looking for something like 60 cents on the dollar and that the investors would only be willing to pay 30 cents," Douglas Elliott of the Brookings Institute told "Good Morning America."
Christina Romer, head of the Council of Economic Advisers, told "GMA" that about 8 percent of the investment money will come from private sources, but the rest of the money to buy the toxic assets will come from taxpayers.
She emphasized that the $1 trillion program is just part of the effort to lift the economy that has included money for banks, for small businesses, for homeowners and a stimulus program to spend billions on highways, bridges and other infrastructure programs.
Administration officials said the new program was better than the two other alternatives.
Bad option No. 1: let the toxic assets stay on the banks' balance sheets, "the kind of hands-off approach that has led to other countries having financial crises that lasted years and years as opposed to months and months."
Bad option No. 2: have a single public bank buy up all the toxic assets, an approach in which "the taxpayer would take all the risk instead of sharing the risk" and that could involve the public bank overpaying for the assets.
Copyright © 2009 ABC News Internet Ventures
The Treasury Secretary Hopes to Attract Private Investors to Buy Toxic Assets
By MATTHEW JAFFE and JAKE TAPPER
March 23, 2009—
Treasury Secretary Timothy Geithner announced today a much-anticipated plan that could cost up to $1 trillion in public and private funds which the president hopes will play a key role in ending the nation's banking crisis.
The plan aims to remove so-called toxic assets -- many of them bad mortgage investments -- from the banks' balance sheets through a private-public partnership. The program will rely heavily on private investors, such as hedge funds and private-equity firms, to buy up $500 billion to $1 trillion of assets with the government providing incentives such as low interest loans and sharing in both the risk and possible profits.
"The point of the program is to save the taxpayers money by attracting private capital," a senior administration official said.
With the bad assets off their balance sheets, banks would be expected to start lending again.
The $1 trillion Public-Private Investment Program is Obama's latest attempt to pull the economy out of its dive, but it's not the last. On Tuesday, the administration wil lay out its plans to increase its regulation of Wall Street to ensure that the current crisis is not repeated.
Click Here for the Latest Business Stories From ABC News
The administration needs to address two problems. First, banks are not lending because their balance sheets are weighed down by these deteriorating toxic assets. Second, the assets are tough to price because of currently depressed pricing levels.
To solve these problems, the treasury's plan is guided by a program with three general principles.
Using the Federal Reserve System and the Federal Deposit Insurance Corp., the government will leverage private capital by co-investing with the private sector. If the private sector has financing provided by the government, buying these assets becomes a more attractive option.
Second, the administration wants the market, not the government, to set the price for these assets.
"The greatest waste of taxpayer dollars would be us paying too much," an official said.
No Silver Bullet
Third, the private sector will invest alongside the taxpayer on an equal basis, so both parties share the downside risk and upside potential.
To accomplish this, the treasury will partner with the FDIC in a program where banks can bring assets they want to sell to the FDIC. The FDIC will provide leverage, then the assets will be sold in the market, where private market participants will bid on them, thereby setting the price. Then the government can co-invest with the private sector to buy pools of toxic assets and clean up the banks' balance sheets.
To address toxic securities, the treasury will partner with the Fed in a program building on an existing lending program. The Fed will provide leverage for private sector participants to buy securities.
"This is not something that shields the private sector from risk," a senior administration official said. "If they do well, we will do well. If we do poorly, they will do poorly as well. So it avoids what's been so wrong in the past where you've had, as the president has said, 'Heads I win. Tails the taxpayer loses.'"
"We have seen and I expect to see a lot of interest from the private sector," Geithner said in announcing the program, although he said the private investors will try to take on "more risk or a greater share of the losses."
"But I think you're going to see a fair amount of interest in this," Geithner said.
Some investors though might shy away, concerned about a populist revolt.
"There is a fear that if you do well off this, they are going to come after you," said Charles Biderman, CEO of TrimTabs Investment Research, which provides data to investors including many hedge funds. "I wouldn't want to participate with this. I don't want busloads of people coming to my house."
But Joel L. Naroff, president of Naroff Economic Advisors and chief economist for TD Bank, said that investors will participate.
"The question is: how much can they wring from the government to insulate themselves from this," Naroff said. "I don't think they are going to be tarred and feathered if they get involved in a partnership with the government and they make money off of it."
Besides, such profits wouldn't be seen for several years.
"If they are making money off it, it means that the market has moved forward, it means things are getting better and people's focus of attention will have changed," Noraoff said.
The administration emphasizes that there is no "silver bullet" to solve this problem.
"This is a large problem that is going to take a long time to solve," a senior administration official said.
"We're attempting to coax a multitrillion-dollar market back to life in an extremely difficult economic and market environment and that's going to take time," the senior official said.
Today's detailed plan comes a month after the Obama administration first announced it would try to take the toxic assets off the banks' books. But the timing might be difficult.
The public has grown weary of multibillion-dollar bailout after bailout, especially when learning about executives still buying private jets and receiving large bonuses. Last week, the nation learned that some executives at insurance giant AIG had gotten a total of $165 million in bonuses after the company gave received more than $170 billion in government bailouts to remain in business.
And today, ABC News revealed that JP Morgan is spending tens of millions on new corporate jets as well as a plush new hangar for its aircraft.
At the same time, government efforts to rein in such bonuses have made some banks and investors wary of doing business with the government.
Obama Says Some Assets "Completely Worthless"
Obama made the case for today's massive program during his appearance Sunday on "60 Minutes" when he argued that it's necessary to team up with Wall Street because there are "systemic risks" in the economy.
"There are certain institutions that are so big that if they fail, they bring a lot of other financial institutions down with them," he told "60 Minutes."
Still, there is the problem of how to value these "toxic assets" and Obama suggested on "60 Minutes" that some of them may be "completely worthless." Nevertheless, the banks holding them expect to sell them.
"The banks are going to be looking for something like 60 cents on the dollar and that the investors would only be willing to pay 30 cents," Douglas Elliott of the Brookings Institute told "Good Morning America."
Christina Romer, head of the Council of Economic Advisers, told "GMA" that about 8 percent of the investment money will come from private sources, but the rest of the money to buy the toxic assets will come from taxpayers.
She emphasized that the $1 trillion program is just part of the effort to lift the economy that has included money for banks, for small businesses, for homeowners and a stimulus program to spend billions on highways, bridges and other infrastructure programs.
Administration officials said the new program was better than the two other alternatives.
Bad option No. 1: let the toxic assets stay on the banks' balance sheets, "the kind of hands-off approach that has led to other countries having financial crises that lasted years and years as opposed to months and months."
Bad option No. 2: have a single public bank buy up all the toxic assets, an approach in which "the taxpayer would take all the risk instead of sharing the risk" and that could involve the public bank overpaying for the assets.
Copyright © 2009 ABC News Internet Ventures
