MARCH 2, 2009, 8:17 P.M. ET
Funding for 'Bad Banks' Starts to Get Fleshed Out
By DEBORAH SOLOMON and JON HILSENRATH
WASHINGTON -- The Obama administration, filling in some of the blanks in its bank bailout, is considering creating multiple investment funds to purchase the bad loans and other distressed assets that lie at the heart of the financial crisis, according to people familiar with the matter.
The Obama team announced its intention to partner with the private sector to buy $500billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month. It's central to the administration's efforts to unglue credit markets, alongside a Federal Reserve program aimed at spurring consumer lending in areas such as credit cards and home loans that will be officially launched Tuesday.
No decision has been made on the final structure of what the administration is calling a private-public financing partnership, but one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.
These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.
Under the Fed's program to jump-start consumer lending, known as the Term Asset-Backed Lending Facility (TALF), investors, including many hedge funds, will get access to cheap loans from the Fed to purchase securities backed by consumer debt like car loans and credit-card receivables. more...
*first let me say that $1 Trillion isn't enough. And it isn't because economists, realtors and fund managers still cling to the sinking notion that the housing market will come back, eventually, to 2007 levels. Dream on people. NEVER, will these securities under TALF reach those values. So if we as taxpayers pay .68 on the dollar in the hopes that the securities will rise to .80 but they don't, then what? Just look at AIG! Does anyone remember that derivatives notional value is $600T? Am I the only person who realizes that there are so many of these assets that as far as the eye can see is obsolete?