Tuesday, March 24, 2009

US plan to buy back toxic asset puts taxpayers on the line.

Nation: Basic summary of the plan.

The new plan will draw on up to $100 billion in funds already approved by Congress under the Troubled Asset Relief Program, as well as additional funding from the Federal Reserve. The government will match private investment dollar-for-dollar, and the Federal Deposit Insurance Corp. will put up significant backing, up to $6 for every $1 invested, in exchange for a fee.

The FDIC funding will be in the form of “non-recourse” loans, meaning private investors will be allowed to walk away from their investment if it goes bad, leaving the government with the failed investment and any losses on the loan.

Its a win-win if you are an investor with money and taxpayers are on the hook if a deal goes south.


The Treasury and private investors would combine their capital and turn to the Federal Deposit Insurance Corp, a U.S. banking regulator, or the Federal Reserve for loans.

Under one part of the plan focused on sopping up bad loans, the Treasury will provide up to 80 percent of the initial capital and the FDIC would offer debt financing for up to six times of the combined public-private capital pool.

A separate component, aimed at toxic securities, will have the Federal Reserve broaden its Term Asset-Backed Securities Loan Facility. That $200 billion program will be bumped up to $1 trillion and will begin accepting older mortgage-related and other securities as loan collateral.

In addition, the Treasury will approve up to five investment managers and match their money one-for-one. It will then offer debt financing for 50 percent of the combined capital to buy securities banks want to unload.

The end game is to get credit lending going again, the problem with that is who are you going to lend in this economy with everyone cutting back? The quick way would be to do the same behavior that got us into this mess in the first place which is lend like mad and damn the consequences.

Now we have set the stage for this massive bailout, all future considerations by financial institutions will put this in the equation.

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