Will the Toxic Asset Plan Work?

Today’s lead story in The New York Times is titled, “Toxic Asset Plan Foresees Big Subsidies for Investors.” It describes the new plan by the Treasury Department to address the initial cause of our current recession, the troubled mortgages held by banks.

The plan involves a “public-private partnership” to encourage investors to take a risk and buy some of the bad loans on bank balance sheets. The assets will be auctioned to the highest bidder to hold down costs.

The central problem, as I understand it from the article, is that currently investors are willing to pay 30 cents on the dollar to purchase these assets, mostly commercial and residential mortgages, but banks don’t want to let them go for less than 60 cents because otherwise, they would have to accept huge permanent losses.

There are three components to Obama’s plan: 1) The FDIC will create investment partnerships and loan about 85 percent of the money needed to purchase the assets from banks, 2) The Treasury will create five investment management firms to match private money used, 3) The Treasury will expand lending through the Term Asset-Backed Secure Lending Facility.

Confused? The article gets more complicated in the continuation. For any one who sweats it out and reads the story to the end, there is an ominous note in the last paragraph. The economy is continuing to decline, and financial institutions are continuing to fail. Federal regulators had to take over two of the largest wholesale credit unions on Friday: the U.S. Central Federal Credit Union and the Western Corporate Federal Credit Union.