Today, the WSJ has a story about the Obama administration's efforts to create a version of a public/private joint venture to deal with toxic assets. This was one part of a five part plan announced by Treasury Secretary Geithner on February 9th. The goal was to create a partnership with the private sector that would buy $.5-1.0 trillion of distressed assets from the financial sector.
"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 WSJ report in the article
These sound exactly like distressed hedge funds with government backing. It may work if these new funds can effectively price the assets they want in a manner that would entice banks/financial institutions to let go of them. Unless of course, the FDIC in their stress testing and recommendations effectively mandates that banks get rid of this debt to these new entities. This would be one way of making it happen. The government could limit these assets to a certain percentage of liabilities and force the issue as well.
The other program that is to get started this week is the Federal Reserve's TALF. This plan is set to buy asset backed securities with a focus on consumer type debt like student loans, auto loans, and credit card securitizations. The original amount was going to be $200 billion and now the program is going to be expanded to $1 trillion. This was one area that I thought would work well and aid the securitization market by reducing the spread to US Treasuries. The program is expected to start this week. Go Team Obama!
However, Team Obama or TO has put a limit on those that are issuing the debt that will be purchased under TALF: issuers of asset-backed securities that benefit from Fed financing must be willing to submit themselves to new Treasury Department limits on executive compensation.
This is what I call the Populist Limit on effectiveness.
In that same vein, I feel sympathy for Mr. Geithner at the US Treasury. The Obama administration has placed limits on who can be a nominee in that department and it's holding up the process. There can be no lobbyists and apparently no one from an institution that has taken TARP money. This significantly limits the gene and knowledge pool. So far, there has not be an official nominee list presented to Congress. This includes who the press spokesman, the Undersecretary in charge of domestic policy, and the Undersecretary in charge of international. I think there are about only 3 people who can currently talk officially for the US Treasury.
While everyone applauds the openness of the new administration, there are serious unintended consequences to their policies. This is coming when time is of the essence as equity markets are collapsing, and the economy is in a recession/depression.
There are limits to limits and we are at them now.