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Better Than a Poke in the Eye

The Wall Street Journal editors aren’t doing cartwheels over the latest toxic asset plan:

The best news about the new Treasury bad bank asset purchase plan is that Secretary Timothy Geithner has finally settled on a strategy. The uncertainty was getting almost as toxic as those securities. Now all Mr. Geithner has to do is find private investors willing to “partner” with the feds (Congress!) to bid for those rotten assets, coax the banks to sell them at a loss, and hope that the economy doesn’t keep falling lest taxpayers lose big on their new loan guarantees.

Yes, it might be dicey to get financial firms to pony up, even with most of the risk absorbed by the taxpayers:

Geithner says investors won’t be subject to the same compensation limits as TARP recipients, but what happens if their asset purchases pay off in big profits? Will Congress settle for only half the upside — especially as it faces epic deficits in the years ahead? Most likely, cries will go up that the buyers were allowed to underpay for the assets and thus make a killing.

Especially after last week, every investor has to ask whether the potential payoff is worth the risk of appearing in the future before a Congressional committee, saying “I do solemnly swear . . .” Maybe Treasury should also sell investors some Nancy Pelosi-political risk insurance.

And, no, they aren’t going to Congress to ask for money — that would be, well, so 2008. Now the Fed is running the show (with some help from the FDIC), although the taxpayers are on the hook:

In the case of the FDIC, it will lend at a debt-to-equity ratio of 6-to-l to the buyers. This means, according to the Treasury example, that the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar. The feds and private investors would each put up six cents in capital. If the asset rises in value over time, the taxpayer and investors share the upside. If it falls further, then the taxpayers would absorb by far the biggest chunk of the losses.

Nevertheless, it is a plan, finally. And the markets are thrilled with a plan, any plan that is more than “I’ll tell you later.” Will it work? Who knows. But if Congress and the public have had it with bailouts, too bad. They  just got another really, really big one — probably a trillion dollars worth when we are done with it. Let’s all hope it works better than all the variations which preceded it.



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