March 27 (Bloomberg) -- The Obama administration’s plan to remove distressed assets from bank balance sheets may take three months to begin operating, risking further deterioration in the value of the securities and driving up rescue costs.

No matter how well the plan is designed, delays could mean that prices for mortgage-related assets will drop, requiring banks to take bigger writedowns and seek additional capital from the government, said Christopher Whalen, senior vice president and managing director of Torrance, California-based Institutional Risk Analytics.

“The government has said it thinks the assets are worth more than the 30 cents they could get in the market now -- that it’s 80 cents or 50 cents on the dollar,” Whalen said. “But that 30 cents is going to look good in three months. Loss rates aren’t going to peak until late this year, when those assets will be going for five cents or 10 cents on the dollar. Absolutely they should move faster.”

The three-part government plan, announced March 23 by Treasury Secretary Timothy Geithner, requires a two-week comment period for one program, an application process for asset managers, analysis of the troubled mortgage assets to be sold and assessments of how much debt investors can take on.

As a result, the programs might not be operating before June or July, said Curtis Arledge, a managing director at New York-based BlackRock Inc., which plans to apply to become one of the asset managers for the public-private partnerships.

Falling Asset Prices

Two government officials, who spoke on condition of anonymity because no announcements on timing have been made, confirmed that the program won’t be operating until the summer. Once launched, it will create public-private partnerships to purchase as much as $500 billion of bad debts and securities from banks. The aim, Geithner said, is to allow the banks to clean up their balance sheets, attract private capital and resume active lending.

“The longer it takes, the more likely it won’t do the job,” said Robert Barbera, chief economist at New York brokerage ITG Inc., who supports the program because he believes that cheap government financing for the asset purchases will lift prices. “This allows the squeeze on the real economy to continue. The longer credit is not available from the banks, the greater the drag on the economy, and asset prices drop further.”

The announcement of the plan boosted stock prices and lifted the credit markets. Some investors wondered how long that enthusiasm would last if the process takes months.

‘Need for Urgency’

“There is a need for urgency,” said Steven Persky, chief executive of Los Angeles-based Dalton Investments LLC, which manages a $400 million distressed-assets fund. “The announcement effect has increased prices to a certain extent, but that will not hold for long. People could be disappointed over how long this takes to get running.”

Geithner stressed the need to provide assistance to banks quickly. “We are, and this president is, moving with as much speed and force as we can across a broad economic agenda that we think is necessary for recovery,” Geithner said in congressional testimony on March 23.

In remarks two days later at the Council on Foreign Relations in New York, the Treasury secretary conceded that it might take a while to get the program up and running.

“It’s going to take some time for the operational infrastructure to be put in place, before we actually can start,” Geithner said, without giving a clear time frame.

Applications to become asset managers under the program are due April 10, and selections will be announced by May 1. After that, the asset managers will have to raise at least $500 million of capital each for the fund.

BlackRock Fundraising

BlackRock’s Arledge said the fundraising may take about four weeks, which means the funds could begin purchasing assets by early June. He said that that would be an aggressive schedule, and that a “June-July time frame” was more likely.

Robert E. Litan, a senior fellow in economic studies at the Brookings Institution in Washington, said he saw the legacy assets program as the best the government can do under difficult circumstances.

“Ideally, you’d work more quickly,” Litan said. “But even with the time lag, this does quell some anxieties in the markets. The government is making a calculated bet that this is the best they can do, and that it buys them some time.”

To contact the reporter on this story: James Sterngold in Los Angeles at jsterngold2@bloomberg.net

Last Updated: March 27, 2009 14:03 EDT