Collection of Interesting, Worth Reading NEWS, ANALYSIS & ARTICLES

The plan announced this week by the US Treasury secretary Tim Geithner is designed to clear away a large load of so-called “toxic assets” clogging up America’s financial system. But what are these assets? And how will the plan work?

Financial Times provides a very good video explanation that even the beginners can understand.

Before reading further just make a guess after glancing at the headline of this post.

According to the Bank for International Settlements, the notional value of over-the-counter derivatives worldwide reached a mind-boggling $684 trillion last summer. That's more than six times the scale they had reached by 2002 when Warren Buffett dubbed derivatives "financial weapons of mass destruction".

Perhaps the trillions pledged can plug the leaks from subprime mortgages and failed auto loans, but can we reasonably expect to keep a derivatives market afloat that is at least eight times the size of a contracting global economy? I don't know, but I sure hope Bernanke and Geithner do.

The following table provides as precise an accounting of the crisis as the public record presently permits. After calculations, the combined total of existing, announced, and potential outlays from the Federal Reserve and U.S. government agencies that are directly attributable to the financial crisis will breach $13 trillion! Now match this figure with the guess you made at the start of this post. Did it match? I am sure it did not; at least mine didn't.

The adopted strategy of spending to bring United States out of this mess by propping up the system with loans and guarantees has now been etched into stone ... there is no turning back. To the contrary, experts fear the only path ahead implies still further commitments of public funds and woeful undermining of the U.S. dollar. Lets keep our fingers crossed and hope this plan doesn't go underwater otherwise not only US but whole world will sink along with this titanic ship called United States.

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.

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.