Sunday, March 22, 2009
Here is the mother of all rescue plans!!! As we all know (If you don't know please READ HERE) that among all the issues, issue of toxic assets in at the center of all the banks. This issue in turn is affecting the ability of banks to extend more loans and hence making things worse. As NY Times states, it is believed that there are around $2 trillion of troubled assets that are ruining the balance sheets of banks. In his effort to bring the market back to normal Mr. Obama is planning three pronged approach.
1. To facilitate the selling of banks' troubled assets, FDIC will set up special purpose investment partnerships and lend nearly 85% of money that the above said partnerships will be needing.
2. US treasury will hire few investment management firms and will match the private money on dollar-for-dollar basis.
3. US Treasury, in collaboration with US Federal Reserve, is planning to expand lending through Term-Asset Backed Security Loan Facility (TABSLF). This is more targetted towards the individuals and small businesses. To read more about TABSLF click here OR here.
Rather than just the government doing it alone, it want to encourage private investors (Such as Hedhe Funds, PE firms) whose sentiments are at the lowest and who have put their money under the mattress. To do that FDIC will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets. The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.
1. To facilitate the selling of banks' troubled assets, FDIC will set up special purpose investment partnerships and lend nearly 85% of money that the above said partnerships will be needing.
2. US treasury will hire few investment management firms and will match the private money on dollar-for-dollar basis.
3. US Treasury, in collaboration with US Federal Reserve, is planning to expand lending through Term-Asset Backed Security Loan Facility (TABSLF). This is more targetted towards the individuals and small businesses. To read more about TABSLF click here OR here.
Rather than just the government doing it alone, it want to encourage private investors (Such as Hedhe Funds, PE firms) whose sentiments are at the lowest and who have put their money under the mattress. To do that FDIC will provide nonrecourse loans — that is, loans that are secured only by the value of the mortgage assets being bought — worth up to 85 percent of the value of a portfolio of troubled assets. The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money, according to industry officials. Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.
The key protection for taxpayers, according to people briefed on the plan, is that the private investors will bid in auctions against each other for the assets. As a result, administration officials contend, the government will be buying the troubled loans of the banks at a deep discount to their original face value. Because the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come.
This sounds like a good plan but this plan alone (apart from other rescue packages) gonna cost US a whopping $1 Trillion and there are so many treacherous complexities that haven't been resolved since the bush government was in power.
The full NY Times articles can be read HERE
You may also watch this video from Wall Street Journal regarding the overview of the plan:
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