Toxic Plan, Will It Work?
On Monday, the Obama administration made another aggressive move in their attempts to spark an economic recovery.
Their latest initiative is called the Public-Private Investment Program or PPIP. Although the details are somewhat complex, in a nutshell the PPIP involves enticing private investors to purchase toxic assets by offering public or government incentives such as low-cost government financing and guarantees.
The idea is remove the assets that are weighing on banks' balance sheets and – as a result -- hampering banks' ability to resume more normal lending to consumers and businesses. (The drop in lending is making the current recession worse.)
The plan has two programs—one to purchase securities, the other to purchase loans from banks.
Two of the largest U.S. money managers, BlackRock and PIMCO, expressed interest in participating.
"This is perhaps the first win/win/win policy to be put on the table and it should be welcomed enthusiastically. We intend to participate and do our part to serve clients as well as promote economic recovery," Bill Gross, PIMCO's co-chief investment officer, told Reuters.
Advocates of the plan say it’s a game changer while opponents argue that like so much else, it too, won’t work.
What do you think? We want to know!
Former FDIC Chairman Bill Seidman tells Fast Money he thinks Geithner's plan is sound and that it should help the banks function better. “It’s a great deal for the private sector but that’s the only way you can get them to bid at prices where the banks will actually sell,” Seidman says.
But we won't know for sure for about a half a year. Seidman also tells Fast Money it will probably take at least that long until we see any meaningful results.
How The Plan Works
In one initiative, the government will create up to five public-private partnerships, run by approved asset managers, with the government and private firms each providing 50 percent of the capital. The structure is meant to create a market for the troubled assets, which have been difficult, if not impossible, to price since the financial crisis first erupted 18-months ago.
Toxic assets clogging the balance sheets of financial firms could total $2 trillion and generally fall into two broad categories—illiquid or non-performing
The FDIC will oversee the program and will also provide financing along with the Treasury.
Under the PPIF, participating firms will identify the assets, usually as a pool of loans, which will be auctioned off to the highest bidder. The government will determine how much funding is necessary to enable the transaction, with leverage not to exceed a 6-to-1 debt-to-equity ratio.
The plan will also "create a lending program that will address the broken markets for securities tied to residential and commercial real estate and consumer credit." That will be done through the previously announced Term Asset-Backed Securities Facility, TALF, which was launched last week by the Federal Reserve. The Fed will make "non-recourse loans" to investors to fund purchases of certain assets.
Under this program, the Treasury will partner with private firms in buying mortgage- and asset-backed securities with a triple AAA rating.
While Treasury, in company with private investors, will put up initial financing, the Federal Deposit Insurance Corp and the Federal Reserve will be tapped to offer further financing.
Want more details. Click here for an in-depth breakdown of the plan
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Trader disclosure: On Mar. 23rd, 2009, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Finerman's Firm Owns (MSFT), (RIG), (AXYS); Finerman's Firm Is Short (WFC), (BBT); Finerman's Firm Owns (WFC) Preferred; Finerman's Firm Owns (DNA) Call Spread; Finerman's Firm Owns (BAC) Preferred; Macke Owns (GE), (AAPL), (GS), (MS), (POT), (MOS); Macke Is Short (BRK.b); Najarian Owns (PALM) Stock & (PALM) Calls; Najarian Owns (SWY) Calls; Najarian Owns (C) Call Spread, (GS) Call Spread, (GD) Call Spread, (MS) Call Spread, (POT) Call Spread, (TGT) Call Spread, (XHB) Call Spread
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