End of the Recession?

Today’s lead article in The New York Times is titled, “U.S. Expands Plan to Buy Banks’ Troubled Assets.” It describes the new plan unveiled yesterday to buy up mortgage securities and bad loans held by banks.

Upon announcement of the plan, the stock market rallied almost 500 points.  The plan consists of a three-part “Public-Private Investment Program” to encourage investors to purchase the toxic assets currently weighing down bank balance sheets.

The article, in my opinion, gets a little confusing, but there is a chart in the continuation describing the new proposal.

1. Buying risky home loans: The F.D.I.C. auctions the loans to private investors. After the highest possible purchase price is agreed upon (someone wins the auction), the F.D.I.C. provides financing for up to 85 percent. The Treasury covers half of the remainer.

2. Buying risky mortgage-backed securities: Asset managers are chosen by the Treasury to apply for the securities. The manager raises a certain amount of money to buy the securities. The Treasury matches the private fundraising and then offers loans for the full amount. The entire total is used for the purchase price.

Reading between the lines of the story, this seems like a very good program for investors but not so great for the banks. While no bank has refused to participate yet, this will be a key area to watch in the days ahead.