'Bad Bank' Funding Plan Starts to Get Fleshed Out

[Pirate Smile]

Source: The Wall Street Journal

WASHINGTON -- The Obama administration, filling in some of the blanks in its bank bailout, is considering creating multiple investment funds to purchase the bad loans and other distressed assets that lie at the heart of the financial crisis, according to people familiar with the matter.

The Obama team announced its intention to partner with the private sector to buy $500 billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month. It's central to the administration's efforts to unglue credit markets, alongside a Federal Reserve program aimed at spurring consumer lending in areas such as credit cards and home loans that will be officially launched Tuesday.

No decision has been made on the final structure of what the administration is calling a private-public financing partnership, but one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.



These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

The public-private partnership grew out of the "bad bank" concept, an idea popular among some economists that would have required the government alone to buy up the troubled assets.
The Obama administration jettisoned that idea after running into the thorny issue of pricing. To help banks, the government must pay enough so that firms don't have to suffer additional losses from selling or writing down the value of other similar assets. But there is little public tolerance for overpaying with taxpayer money.



Read more: http://online.wsj.com/article/SB123603913648314649.html

[babylonsister]

1. I wish I knew what this meant. Sounds promising, but anyone? nt

[PSPS]

2. This "bad bank" idea is probably the worst possible way to handle this.

Essentially what it does is use taxpayer's money to buy ALL of these fake assets at their full made-up price. It really, really, really stinks.

If Obama does this, it will permanently scuttle his presidency.

[FrenchieCat]

3. You don't have enough information to poo-poo this idea yet.....

and you give yourself away when you state that taxpayer's money would be used to buy all of the fake assets at their full-made up price. That is not being proposed at this time as this plan is not fleshed out, and I doubt the fleshing will look as you suggest, as it makes no sense for it to be done that way, and Obama isn't stupid.

You are talking out of your ass on this, and really aren't helping matters at all.

[Connie_Corleone]

4. It says right in the article that the administration is NOT going that route.

I wonder if they already have private investment managers identified yet that would be interested in this idea.

[PSPS]

7. You're right (I hope.) The headline is misleading.

I see how this is described as being merely a modification of the "bad bank" idea, with private investment (still, unfortunately, "guaranteed" by taxpayer money.)

[ozu]

5. Rating Agencies

A major factor in the CDO bubble was the corrupt rating agencies like Moody's being allowed to rate portions of a mostly worthless mortgage security as AAA so that pension funds would be legally allowed to invest in them. Now we're creating "new" troubled asset securities and allowing pensions to again invest in something that deserves to be worth 10cents on the dollar?

This just seems like perpetuating the exact system that fucked us in the first place, only this time it's on the books as being taxpayer funded instead of just taxpayer funded after the fact. Someone smarter than me tell me this is not the case.

[CountAllVotes]

6. it is nothing I'd care to invest in

a bunch of bad loans is what the deal is and get everyone to invest in this toxic crap hoping that it might be worth something some day later on. That might happen in 50+ years or so.

I don't see anything but a huge squeeze of money from all directions towards a bum investment.

:shrug:

:dem:

[earcandle]

8. Two points for me:

1. Bad banks sound bad.  I want national banks owned by the
government and employed by former banking staff, and lower
interest rates on borrowing and higher interest rates on
savings, and all of our pension, ssi, and payroll taxes
flowing through it.

2. No private participation.  Just buy our toxic assets, let
us keep them, and repay back our owed amounts at reasonable
rates, with jobs. 


Simple uncomplicated math.  Fuck the politics and who owned
the economy before the crash. Make them accountable.  Don't
bail them out. 
Save those who were duped, and help those who need it.  There
is plenty of money to go around with our tax dollars alone,
payroll that is.  Add sales taxes, and income taxes and we are
really wealthy. It is time we audited these banks.  I am in an
auditing class right now and my uncoming exam states that the
SEC must have audited financials along with SOX audited
internal controls on financial reporting on every public
company within 60 days of Dec 31st.  They should be there
about now.

Let us see them.  And who is auditing them. And who is
frauding us.  ASAP.