How Geithner's bank plan would work
The south side of the U.S. Treasury Department building in Washington, D.C.
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Kai Ryssdal: A month ago Treasury Secretary Timothy Geithner shared just the barest outlines of his plan to save the nation's banks with us. The Dow promptly fell 300 points that day. Today Mr. Geithner filled in the blanks, and traders went wild. The major indices shot up 7 percent or more. We are talking, of course, about the government's plan to get all those bad assets off banks' balance sheets. Remember this is the part of the financial rescue that nobody's been able to crack. Not the Obama administration so far. Not the Bush administration last fall.
The idea, as Secretary Geithner described it today, involves private investors taking on a small fraction of the risk in buying those assets, and the government guaranteeing against what could be huge losses. We will talk to the Treasury secretary about his rescue package in just a bit, but first here's Marketplace's Jeremy Hobson with the details of how it's supposed to work.
JEREMY HOBSON: Think of this public-private partnership as a tandem skydive. Investors are nervous about taking the plunge, so Uncle Sam is jumping with them.
SCREAMING: Please god no!
Now, now, I'm not finished yet. If it's a success, the investor gets the same thrill at a fraction of the risk with Uncle Sam promising to absorb the landing.
SCREAMING:Ready. Set. Woohoo.
Let's say a bank wants to sell a pool of mortgages. The bank might hope to get $100 but according to the FDIC's auction, they're only worth $84. Enter the private investor. He applies to the Treasury, which gives him $6. He puts up $6 of his own. And the FDIC takes care of the other $72. The private investor controls the assets, which means he can sell any time. If the market returns and the mortgages are sold at or above $84, the taxpayer and the private investor share in the gains.
CHRISTOPHER WHALEN: There's a formula that basically allows both parties to share the upside quote/unquote. My fear is though that there won't be any upside.
That's Christopher Whalen with Institutional Risk Analytics. He thinks the plan's worth a try, but he's not convinced there's a market for these toxic assets.
WHALEN: They're trying to raise Lazarus. They're trying to reinvigorate these securities, which as we all know are busted deals. These are deals that nobody wants to trade anymore.
The Treasury Department disagrees. In fact, it expects buyers to go beyond hedge funds and private-equity firms. And include everyone from pension funds to individual investors.
In New York, I'm Jeremy Hobson for Marketplace.