Trillion Dollar Bank Plan

WTF?

President Obama said today that his economic team is “very confident” that the administration’s newest effort to stabilize banks — a mix of public and private funds that could total $1 trillion — will help to free up credit.

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 plan announcement jolted stocks on Wall Street, with the Dow Jones industrial average rallying nearly 500 points, or 6.8 percent, to 7785.86 — the fifth biggest point gain in history.

The new program will use between $75 billion-$100 billion of Treasury funds from the Troubled Asset Relief Program and leverage $500 billion with the potential to expand to $1 trillion of private purchasing power with financing from the Federal Reserve System and the Federal Deposit Insurance Corp.

Using the Fed and the FDIC, 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.

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.

Okay, I really hate to be a downer right now, but this sounds very similar to the program that Paulson came up with and was called the TARP.  Few though that it would work then, and some do not see this working now……wait see.