Investors ready to buy toxic assets (with government money!)

Discussion in 'Wall St. News' started by nicuss, Mar 11, 2009.

  1. nicuss

    nicuss

    US Treasury: Investors ready to buy toxic assets

    WASHINGTON (Reuters) - A U.S. Treasury-led effort to soak up toxic assets from bank balance sheets could draw in private investors with the right government financing, a senior Treasury official said on Wednesday.

    Neel Kashkari, who administers the Treasury's $700 billion Troubled Asset Relief Program, told a U.S. House of Representatives Oversight and Government Reform subcommittee that without financing private investors would pay such low prices for the assets that bank balance sheets would be hurt.

    "We've received inbound unsolicited proposals from the private sector saying, 'We have capital on the sidelines, we want to go after these assets,'" Kashkari said.

    "One of the key challenges is that there's no financing available to the private sector investors, so by marrying government capital -- taxpayer capital -- with private capital and providing financing, you can enable those investors to go after those assets at a price that makes sense for investors and a price that makes sense for the banks," he added.

    Kashkari said the program, which is expected to be detailed by Treasury Secretary Timothy Geithner in coming weeks, would put public capital alongside private capital in purchasing assets, so that "if private investors win, taxpayers win."

    Kashkari's comments about the need to provide financing echoes what many investors have said in recent weeks, with hedge funds, private equity firms and money managers saying that the government must provide leverage in order to attract interest in buying up toxic assets.

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    So let me get this straight. Investors are ready to buy toxic assets if the government offers them financing for (say) 10:1 leverage. Meaning investors ponny up 10%, government comes up with 90% of purchase price. If the assets are good then investors take all profit minus some interest that goes to the government. If things go sour, the investor gets a margin call and he has to sell. Who's buying? Probably nobody. So the investor loses his 10%, government loses its 90%.

    Bottomline: 90% of the loss gets passed on from the bank to the taxpayer. Clever, huh? Which bank wouldn't buy its own toxic junk via a third party "investor" this way?
     
  2. I wish they had retail denominations of this stuff. Savings bonds type things. I'd buy 'em...