A Trillion Here, A Trillion There

A trillion here, a trillion there. Pretty soon, we’re talking about real money. Treasury Secretary Geithner will unveil his plan to rid banks of their toxic assets today. And it’s expected to cost another $1 trillion dollars.  

I’m sure we’re all thrilled to learn that we’ll get yet another new government agency. It’s called the Public-Private Investment Program. It’s charged with removing up to $1 trillion in toxic assets from banks’ balance sheets.  

This agency is already conducting “stress tests” for banks. It will have the power to place weak banks into “conservatorship” in order to clear out the bad debt. Conservatorship sounds like a fancy way of saying nationalization, but maybe that’s just me. The Public-Private Investment Program will also offer low-interest loans to private investors, like hedge funds, to purchase the toxic assets.  

Of course, it’s a major assumption that anyone will want loans to buy toxic assets, even though there appears to be some demand for these assets now, at the right price. Problem is, banks don’t want to let them go at fire-sale prices because they think they might one day recover some value.  

And what if private investors buy the assets and they don’t recover in price? I can only guess that they’ll default on their loans from the Treasury.  

Economists seem to think that this is an important step for the Treasury to take. At least now there’s a focus on the lending market instead of bailing out companies like AIG. But I can’t help but think even more of our tax dollars are being put at risk.  

*****It will be interesting to see how the stock market reacts to this news, especially as it comes right on the heels of Bernanke’s announcement that the Fed will be buying Treasury and corporate bonds and consumer debt.  

I expected the Fed’s announcement to be well-received. And it was, as stocks jumped immediately following the FOMC last Wednesday. I’m not so sure about Geithner’s plan.  

That’s because Congress just set a dangerous precedent when it passed a bill that will tax compensation at AIG last week. While this new law might appease angry voters, it’s also changing the rules after the fact. Don’t be surprised if private investors are hesitant to work with the Public-Private Investment Program. Because now there’s the threat that, if they make too much money, Congress might change the terms of their deals.  

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That’s it for today. I’ll talk to you tomorrow.