U.S. Sets Plan for Toxic Assets

The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance.

But the framework, designed to expand existing programs and create new ones, relies heavily on participation from private-sector investors. They've been the target of a virulent anti-Wall Street backlash from Washington in the wake of the American International Group Inc. bonus furor. As a result, many investors have expressed concern about doing business with the government in this climate -- potentially casting a cloud over the program's prospects.

The administration plans to contribute between $75 billion and $100 billion in new capital to the effort, although that amount could expand down the road.

The plan, which has been eagerly awaited by jittery investors, includes creating an entity, backed by the Federal Deposit Insurance Corp., to purchase and hold loans. In addition, the Treasury Department intends to expand a Federal Reserve facility to include older, so-called "legacy" assets. Currently, the program, known as the Term Asset-Backed Securities Loan Facility, or TALF, was set up to buy newly issued securities backing all manner of consumer and small-business loans. But some of the most toxic assets are securities created in 2005 and 2006, which the TALF will now be able to absorb.

Finally, the government is moving ahead with plans, sketched out by Treasury Secretary Timothy Geithner last month, to establish public-private investment funds to purchase mortgage-backed and other securities. These funds would be run by private investment managers but be financed with a combination of private money and capital from the government, which would share in any profit or loss.

All told, the three efforts are designed to unglue markets that have seized up as investors have stood on the sidelines. One big problem is that many of these assets no longer trade, which means it's very hard to put a price on them. Banks are unwilling to sell at too low a price, and investors are unwilling to take the risk.

The Treasury's hope is that introducing private investors will help create market prices. Earlier attempts to have the government set the prices foundered because too high a price would have hurt taxpayers and too low a price would have hurt banks. Private investors, by contrast, could set a market price because they are unlikely to overpay and banks are unlikely to undersell.

To target troubled securities, such as mortgage-backed securities, the government will create several investment funds. Treasury will act as a co-investor, in most cases contributing $1 for every $1 contributed by the private sector and sharing in the first-loss position.

To target troubled loans, the government will create a Disposition Finance Program with the FDIC. In that case, the government will be a co-investor, but could also agree in some cases to contribute 80% of the financing, with the government putting up $4 for every $1 in private financing. As part of that program, the FDIC would provide guarantees against losses on a pool of loans that a bank wants to sell. The program could guarantee as much as $500 billion in loan investments.

To beef up the amount of government funding, the Treasury is relying on the Fed and the FDIC to provide backing for these programs. For example, under the newly launched TALF, the Fed provides inexpensive and low-risk financing for investors to buy loans backed by consumer credit.

http://online.wsj.com/article/SB123758981404500225.html?mod=mktw

 

Didn't Buffet say in October how he'd love to "join the government in buying the distressed debt"? How this would be the chance of a lifetime?

Looks like Washington should give him a call now and take him up on this, because nobody else in their right mind will

 

Investing - John Paulson spies opportunities in the mortgage wreckage, Goldman Sachs study shows investors should take advantage of `fear of the night` ....

http://www.opalesque.com/fullarticl...hn_Paulson_spies_opportunities_in_the473.html

From FT Alphaville: Goldman Sachs is looking to raise potentially several billion dollars from external investors for a new global fund that will invest in the debt of troubled companies. The fund, which will invest in stressed and distressed debt, will be headed by Richard Friedman, Goldman's head of merchant banking and run under the PIA group, the bank's private equity arm.

Falcone Starts Fund as Harbinger Client Money Remains Locked Up

http://www.bloomberg.com/apps/news?pid=20601103&sid=aCgUvUYwBys0&refer=us




Usual "suspects"...

 

External investors? Why not the GS partners' private funds?

 

Goldman, which accepted billions of taxpayer dollars last fall and, as learned Sunday, was also a big beneficiary of the rescue of the American International Group, is offering to lend money to more than 1,000 employees who have been squeezed by the financial crisis. The loans, offered via e-mail last week, could range from a few thousand dollars to hundreds of thousands.

Working at Goldman has long been regarded as a sure path to riches. But Goldman’s employees are losing money on their personal investments — particularly in Goldman’s own elite investment funds, which have been considered one of the perks of working at the bank.

Now these funds have stumbled, and some Goldman employees who financed their gilded lifestyles by borrowing in good times are suddenly short on cash needed to meet commitments to their personal investments in the funds. “It’s a problem with the culture of spending,” said Gustavo Dolfino, the president of Whiterock Group, a Wall Street recruitment firm. “No matter how much you have, you spend like you have a lot more.”

The development comes at a tumultuous time for Goldman Sachs, which is struggling to recapture its former glory — and profits — since it became an old-fashioned bank holding company. Goldman is one of the eight banks that were told to accept taxpayer money, and it is trying to pay that money back soon.

At least one of the vehicles, in a group known as the Whitehall funds, sank more than 50 percent last year. Another let its investors withdraw their money this year — at a significant loss.

With a focus on real estate and private equity investments, the funds — which also include Goldman Sachs Capital Partners — have traditionally performed extremely well, sometimes increasing sevenfold in a few years. Goldman even promoted its employee participation in the funds as a selling point to outside investors.

 

i kind of wonder if this will be a buy the rumour sell the news type event and we get the final wash out after this most recent bounce. i mean, isnt this plan already baked/priced in in some form?

 

Obama [well.. whoever does his thinking for him] has just a few months to convince the world that it's ok to bring their sidelined multiple trillions back to invest... the toxic assets absolutely have to be contained and eliminated like a virus. Throwing all the money at the situation so far has not brought back the sidelined investment money.. it's about the toxic assets at this point. If the plan is thought to be a good one then prosperity is just around the corner... but Roosevelt said that all the way to WWII [and still got reelected come to think of it]...

 

I wonder who it is that the architects of this plan hope will 'invest' in this scheme? We know that there's enough money sitting on the sidelines to buy these instruments (whether or not doing that is a good idea). I'm wondering if they think that Mom and Pop will start to 'invest', perhaps after being educated about these things by their local financial advisors? Will these things be pitched in the same was as mutual funds are pitched?

Is it assumed that high net worth individuals will be buying these things?

Is there a lot of money outside of the U.S. that will be drawn in?

 

"Toxic Assets"...


Isn't it really...

Toxic Liabilities....?

 

I hope you are not serious. The assets are "toxic" in the sense that they are not worth as much as as the financial institutions have lent against them. But, they obviously still have substantial value. So, no, these are clearly assets and not liabilities.