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Geithner Plan May Aim $1 Trillion at Bad Assets

Updated from 4:28 p.m. EDT

Early signs indicated that the Obama administration's long-awaited plan to handle toxic assets weighing down the financial system may ultimately find success.

The Public-Private Investment Program, or PPIP, unveiled by Treasury Secretary Timothy Geithner on Monday will provide up to $1 trillion in financing and guarantees to private investors to kick-start the frozen credit markets. The Treasury will start the lending program with $75 billion to $100 billion in capital, working with the Federal Insurance Deposit Corp. to entice private investors to buy illiquid pools of loans by offering leverage and guarantees.

The FDIC will insure the majority of the purchase price of the deal, leveraging private funds at a six-to-one debt-to-equity ratio. The Treasury Department will then finance 50% of the remaining balance, leaving private investors responsible for coming up with about 7% of the capital required for the overall deal.

Will the Treasury's plan to help banks get rid of bad assets work?


Pools of loans will be auctioned off to the highest bidder, with the Obama administration hoping that competition among hedge funds and private equity firms will find a balance in pricing the troubled debt. Banks have been unwilling to sell assets at the fire-sale prices offered in the debt markets, and investors have been unwilling or unable to come up with the cash to offer more attractive bids.

In addition to tackling loans on bank balance sheets, the government will also provide financing for the secondary markets. Details for those plans are less clear, though the Treasury will provide at least dollar-for-dollar funding for approved fund managers who purchase mortgage-backed securities that once held a top-notch "AAA" debt rating. In some cases, a fund manager may receive up to three times as much capital from the government as his firm is putting up.
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