Public-Private Investment Program and Private Moneys Fear:Updated

Dept of Treasury

Do you blame them for being nervous, the left and the Democrats want power and control. Anyway the "toxic" assets really are an investment, if someone can get their hands on them. The the heart of the plan is for the Federal government to provide so much money at lucrative terms that doubts about the value of the purchase will be tamped down. An interesting concept but one fraught with pitfalls and future problems. Say it works and private groups find them selves on top of billions of profits courtesy of a sweetheart deals the Fed puts together. Will Democrats control themselves or scream "people over profit" and push confiscatory tax policies on companies who made a fortune off a Government crafted program.

What are toxic assets?




Treasury Department Fact Sheet

Key parts:

• The effort will involve the Federal Deposit Insurance Corp., Treasury Department and the Federal Reserve
• The plan relies on private partners to buy the assets
• Treasury would partner with private investors to buy a pool of troubled assets, providing up to 50% of the needed money.
• The plan would spend $75 billion to $100 billion to start wiping out bad assets and would evaluate how programs are working before deciding how to commit more money. Its possible they will end up spending 500 billion before its over.
• Public-Private Investment Program is the name.
  

Timothy F. Geithner, planned to unveil the details of the administration’s long-awaited plan to purchase troubled assets, meant to remove them from the balance sheets of banks and, in turn, spur banks to lend more money to consumers and companies.The plan relies on private investors to team up with the government to relieve banks of assets tied to loans and mortgage-linked securities of unknown value. There have been virtually no buyers of these assets because of their uncertain risk.

As part of the program, the government plans to offer subsidies, in the form of low-interest loans, to coax private funds to form partnerships with the government to buy troubled assets from banks.But some executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.

The fears are real, we have seen the hysteria over AIG, which was clearly encouraged by democrats as a means to cover up their own involvement with that company. Some impressions from top money men:

Three chiefs of investment firms said in interviews that they were impressed with the terms of the program — which would have the government lend nearly 95 percent of the money for any investment — but remained reluctant to participate because of the potential for future regulation.

“The deal is good, but it’s not worth it if I’m buying myself into a retroactive tax or a Congressional hearing,” the chief executive of a major investment firm said, insisting on anonymity because he did not want to seem at odds with the Treasury Department in the event that his firm ends up participating.

Despite the reluctance of some investors, others voiced optimism about the plan. Laurence D. Fink, chief executive of BlackRock, a money management company, said his firm planned to participate in the program.“We will be raising money on behalf of our clients,” he said, adding that he was not worried about government intervening in his business. “I don’t see how Congress can interfere in this.”

I would tell Mr. Fink you would be surprised what Congress could do, as for the anonymous chief executive, his response can directly linked to the hate and hysteria directed "finance" Understand I know what AIG has had its hands in, but the frenzy last week was completely off the mark and outrageous.

From CNN:

Administration officials, in a briefing with reporters late Sunday night, said they plan to commit $75 billion to $100 billion to start wiping out bad assets and would evaluate how programs are working before deciding how to commit more money.

The goal is to buy up at least $500 billion of bad assets -- loans, such as those for subprime mortgages, that are now in danger of default.

Investors have been waiting expectantly for details since last month when Treasury Secretary Tim Geithner announced the framework of a plan to address two of the biggest problems in the banking sector: the toxic assets keeping banks from lending and the shortage of capital at major institutions.Under the new Public Private Investment Program, taxpayer funds will be used to seed partnerships with private firms to buy up assets backed by mortgages and other loans.

Tim Geithner's explanation:

The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions.No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated.

The Plan fleshed out:

The plan calls for the government to put up most of the money for buying up troubled assets, and it would give private investors a clearly advantageous deal. In one program, the Treasury would match, one for one, every dollar of equity that private investors invest of their own money in each “Public Private Investment Fund.”

On top of that, the F.D.I.C. — tapping its own credit lines with the Treasury — will lend six dollars for each dollar invested by the Treasury and private investors. If the mortgage pool turns bad and runs big losses, the private investors will be able to walk away from their F.D.I.C. loans and leave the government holding the soured mortgages and the bulk of the losses.

The Treasury Department offered this example to illustrate how the program would work: A pool of bad residential mortgage loans with a face value of, say, $100 is auctioned by the F.D.I.C. Private investors submit bids. In the example, the top bidder, an investor offering $84, wins and purchases the pool. The F.D.I.C. guarantees loans for $72 of that purchase price. The Treasury then invests in half the $12 equity, with funds coming from the $700 billion bailout program; the private investor contributes the remaining $6.

An attractive feature of the program is that it will allow the marketplace to establish values for the assets — based, of course, on the auction mechanism that will signal what someone is willing to pay for them — and thus might ease the virtual paralysis that has surrounded those assets up to now.

For a relatively small equity exposure, the private investor thus stands to make a considerable return if prices recover.

CNN on the Cost:

But the latest program may very well add to the cost of federal bailouts to date. So far, the government has spent $2.5 trillion of the more than $12 trillion authorized for programs aimed at propping up the nation's financial services industry and the broader U.S. economy.

Reid is supporting, in the Reid way of course:

WASHINGTON (CNN) — Senate Majority Leader Harry Reid said Monday the Treasury Department's plan to rid banks of toxic assets carries "the potential for both risk and reward."

But he said the risk of using public money to buy troubled assets is outweighed by the need to act quickly to get credit flowing again.

"The Treasury Department plan is based on the sound principle that if we are to revive our economy, we must unfreeze the credit markets so people can get the loans they need to keep their small businesses open, buy a car or send their children to college," Reid said in a statement

Market Rallies on Plan:

NEW YORK (CNNMoney.com) -- Stocks surged Monday, recharging the rally, after Treasury's plan to buy up billions in bad bank assets and a better-than-expected existing home sales report raised hopes that the economy is stabilizing.

The Dow Jones industrial average (INDU) gained 497 points, or 6.8%, according to early tallies, posting its biggest one-day point gain since Nov. 21. The S&P 500 (SPX) index rose 54 points, or 7.1%. The Nasdaq composite (COMP) added 99 points, or 6.8%.

"I think the stock reaction is a vote of confidence in the plan," said Jack Ablin, chief investment officer at Harris Private Bank.

Its all ready under attack, from the left and right. If the President is half as persuasive as his boosters say he has a heck of a job in front of him:

WASHINGTON (CNN) -- If Treasury Secretary Tim Geithner is hoping to find strong bipartisan congressional support for his long-awaited troubled-asset bank relief plan, it appears he'll need to keep looking.

A key Republican congressional leader blasted Geithner's plan within hours of its release Monday, saying it amounted to a flawed "shell game" that hides its true cost from taxpayers.The plan is deceptive and "fundamentally flawed," House Republican Whip Eric Cantor, R-Virginia, said in a written statement...........

Rep. Brad Sherman, D-California, slammed the plan, saying it treated banks better than taxpayers.The plan "involves a thousand times as much money as AIG executives received in bonuses, and it would make the American people a thousand times as angry, except for the fact that it is so technical that the American people may not fully understand it," Sherman said in a speech on the House floor.

Taxpayers "are going to overpay for some, they are going to underpay for others. They are going to make money on some. They are going to lose money on others. [But] when they make money, half the profit goes to Wall Street. When they lose money, 94 percent of the loss goes to the taxpayer."