Tuesday, March 3, 2009

The Bad Asset Plan

From the WSJ:

The Obama team announced its intention to partner with the private sector to buy $500 billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month. It's central to the administration's efforts to unglue credit markets, alongside a Federal Reserve program aimed at spurring consumer lending in areas such as credit cards and home loans that will be officially launched Tuesday.


These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

I've had issues with nationalization -- primarily because no one has effectively dealt with the issue of preventing the type of corruption that led to the financial sector's problems from happening again.

Over the last several weeks I endorsed a plan (and yes, I know that so many people are lining up for a Bonddad endorsement that it means so much) where the government would essentially create a "super-bank". I liked this idea because it only involved one bank -- meaning, there was only one institution to monitor. That made sense.

However, this idea is interesting. The government and the private sector form a partnership with the government putting up money along with the private sector. In addition, the private sector would run the fund. The main problem is the fact that banks would have to sell their bad assets at some price -- which they have so far been unwilling to do. However, if we can get some savvy investment people to run these funds, it could be the start of a semi-private RTC that has intriguing potential.