The federal government's private sector partnership to dispose of toxic bank assets may also be the ideal way to clean up its own sagging balance sheet.

The Treasury Department on Monday extended the deadline for asset managers interested in participating in the Public-Private Investment Program two weeks to April 24, "to better accommodate increased participation."

The move comes two weeks after Treasury and the Federal Reserve said they were seeking to liquidate the so-called Maiden Lane facilities that were created to take on unwanted assets acquired in the rescues of Bear Stearns and American International Group ( AIG).

Maiden Lane, named after the New York Fed's street address, is the limited liability company formed to take on soured assets left after JPMorgan Chase ( JPM) acquired Bear in a government-assisted deal in March 2008.

Maiden Lane 2 was established to take on $18 billion in subprime mortgages from AIG, followed by Maiden Lane 3, which took on $24 billion of the insurer's bad collateralized debt obligations, or CDOs.

There is very little transparency for the roughly $70 billion Maiden Lane portfolios. Information is closely guarded, and representatives have resisted discussing it. BlackRock ( BLK), which manages the portfolios, would not comment on them.

The Federal Reserve, when it took on the Bear Stearns assets in the first Maiden Lane, initially said it did not anticipate a loss to taxpayers because the assets would either be held to maturity or sold at a profit. A year later, however, the portfolio appears to have dropped in value.

The New York Fed paid $28.8 billion for the assets, with JPMorgan kicking in an additional $1.1 billion. Current fair value placed the portfolio at $26 billion as of April 1, according to the statistical release by Fed. So, in one year, the portfolio has already declined by over $2 billion.

But, since the Financial Accounting Standards Board decided to relax the mark-to-market, or fair value, accounting rules, then it's possible that much of those losses will disappear.

Through the PPIP, the government will open a marketplace in which it practically pays investors to buy junk. Pimco, the bond giant owned by Allianz ( AZ), along with Blackrock, Goldman Sachs ( GS), Morgan Stanley ( MS) and Franklin Resources ( BEN), fit the government's original criteria, but smaller players may get their wish to get in on the action with Monday's changes.

Treasury said it is considering expanding the program to smaller fund managers "to maximize the inflow of private capital into the market from firms large and small while protecting the interests of U.S. taxpayers."

"The goal of the ... PPIP is to restart the market for legacy securities, allowing banks and other financial institutions to free up capital and stimulate the extension of new credit," Treasury said in a press release.

It just may be working to free up the Fed to do the same.

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