Here is how they were recently described:
1) Mortgage-backed securities purchase program: This team is identifying which troubled assets to purchase, from whom to buy them and which purchase mechanism will best meet our policy objectives. Here, we are designing the detailed auction protocols and will work with vendors to implement the program.
2) Whole loan purchase program: Regional banks are particularly clogged with whole residential mortgage loans. This team is working with bank regulators to identify which types of loans to purchase first, how to value them, and which purchase mechanism will best meet our policy object
.....
4) Equity purchase program: We are designing a standardized program to purchase equity in a broad array of financial institutions. As with the other programs, the equity purchase program will be voluntary and designed with attractive terms to encourage participation from healthy institutions. It will also encourage firms to raise new private capital to complement public capital.
Buying Debt/Loans/Mortgages
Under this plan, the government will purchase problem assets from lenders. Let's look at the pros and cons of this program:
Pros
-- It gets the assets off the books. This prevents the assets from further hurting the financial institution.
Cons
-- Define "troubled mortgage/loan".
-- The only way for this program to work is for enough of the bad mortgages/loans to be purchased to convince lenders that problem mortgages can't hurt the system. Put another way, the government has to purchase enough of these asset to inspire intra-institution confidence. I have no idea what amount that would be.
-- The only assets the institutions will sell are the ones that are probably going to remain depressed in value for the duration of their existence. No one is going to sell an asset that is or has a higher probability of making them money. This means the government stands a higher probability of taking most of the losses.
Equity Injections
Pros
-- The institutions gets cash immediately. In theory, this should encourage the institutions to start lending again.
Cons
-- Why would they want to start lending? We're at the beginning of a recession, defaults are increasing and other lenders have assets on their books that are increasing the possibility of default.
-- With housing values still decreasing in value, anything related to mortgages will also be dropping in value. That means loans and bonds tied to loans will continue to drop forcing institutions to continue writing down the value of these assets. As a result, equity may go loan loss reserves. This means the government will have to buy a large enough amount of equity to encourage lending and possibly the increase in loan loss reserves coming down the pike.
-- The government says it isn't buying an ownership interest that will lead to directing bank policy. I'm finding that a bit hard to believe. Call me cynical.
Conclusion
It's really looking as though it's going to take a combination of both of these ideas to take care of this mess.
