Experts Track Treasury's Toxic-Debt Plan

By BW staff

At least they won't need hazmat suits for this cleanup. On Mar. 23 the Treasury Dept. released details of its plan to address toxic assets weighing on banks' balance sheets. Under the new Public-Private Investment Program—PPIF, for those keeping track of the ever-expanding list of financial rescue acronyms—the Treasury, Federal Reserve, and Federal Deposit Insurance Corp. plan to work with private investors to try to restart a market for soured "legacy assets" and securities that are compromising banks' abilities to raise capital and their willingness to boost lending.

The government will use as much as $100 billion in funds from the Troubled Asset Relief Program and capital from private investors to generate $500 billion in purchasing power to buy legacy assets. The department said the program could potentially expand to $1 trillion over time. (Is it us, or has the word "trillion" lost much of its mystery and majesty recently?)

What did Wall Street economists and analysts have to say about the plan—and other pertinent topics—on Mar. 23? Here's a sampling, as compiled by BusinessWeek staff:

Peter Possing Andersen, Signe Roed-Frederiksen, Danske Bank

The announcement of the details in the PPIF should be a step forward in increasing the credibility in the U.S. government's effort to stabilize the financial system. However, as the current approach remains based on private sector participation, the success of the initiative cannot be taken for granted. Another caveat lies in the lack of an exact schedule for when the programs are to be fully implemented. Finally, it remains difficult to judge whether the allocated capital in the program remains sufficient to unlock the frozen credit mechanism.

While we are cautiously optimistic that the current efforts will eventually be successful, we believe that the market probably needs to see some examples of successful implementation before it gains full confidence in the rescue efforts by the Treasury.

Tony Crescenzi, Miller Tabak

Explicit safeguards against invested capital are absolutely essential to investors these days, which is why explicit language on compensation and disclosure rules is necessary for the Public-Private Investment Program to work. This seems likely at some point, and the White House has already made clear that it opposes any ex-post rule changes that would harm investors in the PPIP. Investors need to see the AIG (AIG) tax fail or have both explicit and binding assurances that their involvement in the PPIP will be unencumbered and protected against future acts of Congress.

The Public-Private Investment Program will likely draw in major players to a market where there is currently no market. It will start slowly at first, but portfolio managers will want to participate in part out of fear competitors will be participating and earning returns that beat their own. Explicit language on compensation and disclosure rules will help broaden its appeal. It would help also if Treasury would provide details on haircuts, lending rates, minimum loan sizes, and loan durations, all facts that the Treasury said have not been determined.

Action Economics

U.S. equities [rose sharply on Mar. 23] as the government lays out more details on the public-private investment plan on toxic bank assets, which have helped fuel more double-digit gains in the financials, especially Citigroup (C) and Bank of America (BAC).

It is more than a little surreal, however, that private investors will be levering up FDIC, TARP, and TALF [Term Asset-Backed Lending Facility] funds to buy these toxic assets, while investors were apparently gun-shy of participating in TALF last week due to the AIG bonus fracas and Congress potentially changing the rules of the game.

Jay Collins, DT Trading

[Treasury Secretary] Geithner unveiled his "toxic asset plan" [on Mar. 23], and you can almost smell the popcorn machine working its magic as the government prepares to inform us all of how this will get us out of this mess. One old and simple rule to keep in mind, "buy the rumor, sell the fact."

Ed Yardeni, Yardeni Research

They finally did it. Last Wednesday's FOMC statement announced that the Fed would purchase $300 billion of Treasury bonds and upped the Agency purchase program from $100 billion to $200 billion in debt and from $500 billion to $1.25 trillion in mortgage-backed securities (MBS). So these actions will increase the Fed's balance sheet by $1.75 trillion, from $2.05 trillion on Mar. 18 to $3.8 trillion probably by the middle of this year. Showing a sense of urgency at last, the Fed purchased $158 billion in MBS last week.

Such an explosion of the Fed's assets must be matched by an identical explosion in the Fed's liabilities, i.e., high-powered money, which consists of currency and bank reserves. "Helicopter" Ben Bernanke loves the smell of high-powered money in the morning. He intends to blitz the economy with so much liquidity that it will blast away the liquidity trap.

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