Fallout: The Financial Crisis

U.S. may start funds to buy bad assets

Steve Henn Mar 3, 2009
HTML EMBED:
COPY
Fallout: The Financial Crisis

U.S. may start funds to buy bad assets

Steve Henn Mar 3, 2009
HTML EMBED:
COPY

TEXT OF STORY

KAI RYSSDAL: The Fed chairman maintains that we’ve got to move aggressively to solve our economic problems. So he and the Treasury secretary are going ahead with a plan to bail out the banking system. The government’s going to buy up a trillion dollars in mortgage backed securities gone bad. The Wall Street Journal reported today the administration may create several new funds with private investors to do it.

Marketplace’s Steve Henn has more.


STEVE HENN: The Treasury Department’s never figured out how much to pay for bad banking assets. If it paid too little it would push banks toward insolvency. Too much and taxpayers lose. The latest idea is to outsource the problem to private equity firms.

DOUG DIAMOND: Like they are hiring private sector consultants to help them vet and price the assets that they buy.

Doug Diamond’s a banking professor at the University of Chicago. Over the past month, he says Treasury Secretary Tim Geithner has backed away from the idea that the government will buy up bad assets directly from banks. And now he’s developing plans to work with private investors.

DIAMOND: It’s partly to make it look as if it’s not really as expensive as it really is.

But if the government is scared of investing in bad banking assets why will private equity investors be willing take the risk?

DIAMOND: They’re going to give a very high rate of return to the private investors that go into this to induce them to take this risk in this kind of environment. And that may just be the price of admission.

The idea is the government would loan investors money. They’d kick in some cash of their own and go shopping for troubled bank assets. If they bought wisely, they’d keep the most of profits. But…

MANN: If all of these assets in fact are worth nothing then the U.S. Treasury wouldn’t get its money back.

Catherine Mann is an economist at Brandeis. She says private investors would keep the most of the potential profit and taxpayers would take a lot of the risk. But this might just be a way to bring the banking system back to life.

In Washington, I’m Steve Henn for Marketplace.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.