Government to offer remarkably complex plan to buy toxic assets
It is hard to analyze whether the plan that the Treasury Department will announce next week to get toxic assets off bank books will work. It is astonishingly complex.
According toThe Wall Street Journal, "The federal government will announce as soon as Monday a three-pronged plan to rid the financial system of toxic assets, betting that investors will be attracted to the combination of discount prices and government assistance."
One of the key parts of the plan is that private investors including hedge funds are expected to buy some of the troubled assets. The government would put up a part of the money to take assets off bank balance sheets and guarantee the value of some of the assets if the risky paper falls sharply in value. The FDIC would offer many of these guarantees.
As a number of observers have pointed out, it is not clear that private capital will want to be involved in these programs at all. Government guarantees and access to government money to help buy the toxic assets may be attractive, but it assumes that hedge funds do not want to use their money to invest in other opportunities created by the recession like distressed bonds.
It appears that the Treasury does not have a "Plan B" if private capital cannot be enticed into purchasing toxic paper. That begs the question of what banks do it they don't have enough buyers to help them clear up balance sheets.
Douglas A. McIntyre is an editor at 24/7 Wall St.