Fallout: The Financial Crisis

Private money could finance ‘bad bank’

Nancy Marshall-Genzer Feb 9, 2009
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Fallout: The Financial Crisis

Private money could finance ‘bad bank’

Nancy Marshall-Genzer Feb 9, 2009
HTML EMBED:
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TEXT OF STORY

KAI RYSSDAL: The president’s push on the stimulus plan, including tonight’s press conference, means Treasury Secretary Timothy Geithner had to slide his big announcement till tomorrow. Geithner is set to outline how the government’s going to spend the second half of the $700 billion bank bailout, the TARP it’s called. The administration is expected to set up something like a bad bank, or what’s called an aggregator sometimes. It would store or aggregator all the shaky debt that’s caught up in the subprime mess. Early word is that the government’s going to try to partner with the private sector to do it. Marketplace’s Nancy Marshall Genzer reports.


NANCY MARSHALL GENZER: Remember what you learned in kindgergarten? You make a mess, you clean it up. The Obama administration is applying that to Wall Street — with a twist.

DOUGLAS DIAMOND: You clean it up, and if it gets too messy, the teacher will help you out here.

University of Chicago finance professor Douglas Diamond says here the help would come from the government. It appears Treasury would give private investors some government guarantees. These investors could include hedge funds and insurance companies. They’ve stayed on the sidelines because they’re afraid of buying too early, missing a fire sale. Diamond says the government will tell the investors, “If you pay a lot more now than you would have later, we’ll help you out.”

DOUGLAS DIAMOND: If it’s 25 percent off, too bad for you. But if it’s 50 percent off, we give you a partial reimbursement.

In return, the government is asking the private sector to value those pesky subprime securities.

Robert Barbera is chief economist at brokerage firm ITG. He says the government can’t value these assets. There are too many variations. It’s like ice cream.

ROBERT BARBERA: There’s lots of flavors. You’ve got sprinkles. You have people who have spent their lives looking at this stuff. And, you know, you’re going to have to enlist them to help you sort through the various flavors.

But Bill Black says that help would come at too steep a price. Black teaches economics and law at the University of Missouri. He says the government would be taking on too much risk by cushioning private investments.

BILL BLACK: The taxpayers are being played for a chump.

But that’s exactly why the government wants the private sector to buy most of the troubled assets.

In Washington, I’m Nancy Marshall Genzer for Marketplace.

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