TOPICS > Economy

Obama Team Launches New Plan to Buy Bad Assets From Banks

March 23, 2009 at 6:00 PM EST
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White House economic adviser Lawrence Summers details the Treasury Department's plan to clear "toxic" assets from banks through a combination of public and private investment.
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JIM LEHRER: The Obama administration launched a new effort today to buy up bad assets from banks, and it touched off the strongest rally on Wall Street in nearly five months, with major indexes gaining roughly 7 percent.

The Dow Jones Industrial Average surged 497 points to finish above 7,775. The Nasdaq index rose 98 points to close above 1,555. And the Standard and Poor’s 500 was up 54 points to finish near 823.

Judy Woodruff has our lead story report.

JUDY WOODRUFF: Details of the plan were worked out at the Treasury and next door at the White House, where this morning President Obama met with Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke.

BARACK OBAMA, President of the United States: The good news is that we have one more critical element in our recovery, but we’ve still got a long way to go, and we’ve got a lot of work to do. But I’m very confident that, with the team that we’ve got assembled, we’re going to be able to make it happen.

JUDY WOODRUFF: The plan is designed to persuade private investors to help buy up to $1 trillion in so-called “toxic” assets. Billed as “the public-private investment program,” it gets an initial infusion of up to $100 billion.

The money will come from the TARP, the financial rescue package approved by Congress last fall. The ultimate goal is to get bad debts related to mortgages and securities off the books at banks and, in turn, get them lending again to boost the economy.

Buying those bad housing debts was the original rationale for the TARP last fall, but no one could say what they were worth, and it never happened.

This morning, Christina Romer, the head of the White House Council of Economic Advisers, told ABC this new initiative addresses that problem.

CHRISTINA ROMER, Head of President Obama’s Council of Economic Advisers: The market for these so-called toxic assets has basically disappeared. And so the reason the government is coming in at all is to try to recreate this market.

But it is going to be an open bid; that’s part of why we’re going in with the private sector. They’re going to have money on the line, just like we are, and the whole idea is to make sure we don’t overpay for them, right? What we think we’re going to be doing is bidding what these things are actually worth.

Congress cites taxpayer risk

Rep. Brad Sherman
D - California
The taxpayer gets 50 percent of the profits. The private Wall Street interests puts up 6 percent of the money, maybe less, and they get 50 percent of the profits.

JUDY WOODRUFF: To sweeten the pot, the Federal Reserve Bank and the Federal Deposit Insurance Corporation will offer low-cost loans to cover the purchases, hoping to entice pension funds, insurance companies, and other large investors. Banking officials generally praised the program's outline, but some in Congress complained it all means too much risk for taxpayers and not enough for the private sector.

REP. BRAD SHERMAN (D), California: The taxpayer puts up 94 percent of the money; the taxpayer takes 94 percent of the risk that the assets purchased will end up being worth nothing, 94 percent. And the taxpayer gets 50 percent of the profits. The private Wall Street interests puts up 6 percent of the money, maybe less, and they get 50 percent of the profits.

JUDY WOODRUFF: On the other hand, House Republican Whip Eric Cantor argued there's not enough incentive for private investors.

But in a CNBC interview, Treasury Secretary Geithner said both critiques are wrong.

TIMOTHY GEITHNER, Treasury Secretary: They're going to get a return that private investors get alongside the market in this case. You know, this is the best way, in our view, to protect the taxpayer.

The alternative approach is we should have the government buying all this stuff, taking on all the risk on their balance sheet, which would be much more expensive to the taxpayer. The alternative of letting it just sit there, let these assets just sit on the balance sheets of banks, would risk creating a much longer, deeper recession.

JUDY WOODRUFF: It remained an open question today whether the private sector will partner with the government, especially after the bonus storm at AIG. And Senate Majority Leader Harry Reid vowed to keep pushing to recoup the bonuses.

SEN. HARRY REID (D-NV), Senate Majority Leader: We'll continue to work to right this egregious misuse of taxpayer dollars. Republicans have asked for more time to study the legislation, and they're entitled to that. With Republican cooperation, though, we can quickly and responsibly return these funds to the American people.

JUDY WOODRUFF: As for funding the toxic assets program, the Treasury is not asking Congress for additional money for the time being, but it's signaled it could seek hundreds of billions more for that purpose down the road.

Valuing toxic assets

Lawrence Summers
White House Economic Adviser
There's actually more risk in the government not taking steps like this, because if the government doesn't take steps like this, the economy will go further down.

JIM LEHRER: We get more now on the new plan from Lawrence Summers, chairman of the National Economic Council and assistant to the president for economic policy. Gwen Ifill spoke with him a short time ago.

GWEN IFILL: Mr. Summers, welcome.

LARRY SUMMERS, White House Economic Adviser: Glad to be with you, Gwen.

GWEN IFILL: At the heart of this plan that Secretary Geithner introduced today is the idea that somehow these assets, which some people call "toxic assets," but which I notice you all call "legacy assets," that they're somehow worth saving. How do you value that? How do you know that it's worth a government investment?

LARRY SUMMERS: Well, our approach is premised on the recognition of a market failure that we have right now. Traditionally and usually these assets trade all the time between people who borrow money in order to finance their purchase.

That market, where they're able to borrow money, what people call "get leverage," has broken down. And as a consequence, the assets have lost a significant part of their value, just as if, all of a sudden there was no mortgage value, houses would lose a substantial part of their value.

And so, by providing the financing that enables that market to work, we enable more realistic valuations of these assets. We enable these assets to trade again. That means that people are in a position to originate loans and sell them into the market, and that gets the flow of credit going.

That's the central idea behind the programs that Secretary Geithner announced today. That's the central idea behind the consumer and business lending initiative of the Treasury.

We started to see results last week in additional lending, in the origination of new loans because of the availability of these programs. And over time, these will increase the flow of credit.

And increasing the flow of credit is one component of an economic strategy that will get our economy going again, because more credit will mean a stronger economy, which in turn will mean a healthier financial system, meaning more credit, and we'll see some of those vicious cycles of recent months turned into virtuous circles.

GWEN IFILL: But no matter how much government involvement is involved here, there's a certain amount of risk involved. So how do you measure -- how do you decide how much taxpayer risk is too much risk?

LARRY SUMMERS: Well, there's actually more risk in the government not taking steps like this, because if the government doesn't take steps like this, the economy will go further down. That will mean less tax collections.

The banks will be in worse trouble, and that will mean greater liabilities for deposit insurance. The financial system will be much weaker, and that will mean a weaker economy, which ultimately will hurt the government's financial position, not to mention the interests of taxpayers.

So I would argue that the steps that we took today, like the steps that President Obama has been taking since he took office -- the Recovery and Reinvestment Act, the initiative to reduce housing foreclosures and to provide credit to the mortgage market -- these are actually insurance policies. These are policies that reduce risk by eliminating or scaling back the risk of an even more severe economic downturn.

It's the same idea with the capital program. By preparing for the worst and providing that insurance, we make it much more likely that we'll have stability. And that ultimately reduces the risks to the taxpayers.

Main goal to unfreeze credit

Lawrence Summers
White House Economic Adviser
The reality is that this economic crisis is terrible for taxpayers, terrible for investors, and terrible for American workers. And by restarting the flow of credit, which is what this program does, we're going to benefit all three groups.

GWEN IFILL: And to get the private sector involved, you have to make it attractive enough for them that they then line up. But is it possible that the government is giving the private sector too good a deal on something like this? I mean, the great bulk of the investment here is going to be made by taxpayers, isn't it?

LARRY SUMMERS: Let's be very clear about two things. First, taxpayers will not lose a penny until the private investors have lost 100 percent of their investment.

Second, if there are substantial profits, taxpayers will share in them 50-50, because they'll be invested alongside the private sector.

So this program is very carefully designed to protect taxpayer interests, and it moves beyond what, frankly, has been a fallacy in a number of people's discussions of these things, which is that there's some kind of zero-sum gain here and that, if something is good for investors, it's bad for taxpayers.

The reality is that this economic crisis is terrible for taxpayers, terrible for investors, and terrible for American workers. And by restarting the flow of credit, which is what this program does, we're going to benefit all three groups.

GWEN IFILL: But, Mr. Summers, the reality also is that you probably couldn't pick a worse time to come to the American people with an appeal for them to shore up the private sector. You must not be functioning in a vacuum here when you find out -- when you discover the amount of bailout fatigue and bonus fatigue there is out there.

How do you make that argument to the American people that everyone is on the same side here?

LARRY SUMMERS: You know, President Obama, I thought, spoke to that very powerfully on "60 Minutes" last night, as he spoke very powerfully in his speech to the joint session of Congress.

He recognized and he shared the outrage that people feel at what has happened, at some of the bonuses that have been paid, about some of the irresponsibility that brought us to this point. But he also urged that we can't govern out of anger, that we can't let our rage, our legitimate anger, stop us from the necessary steps.

And these steps are steps which a wide range of financial experts see as constructive, constructive for the American economy, but also constructive for taxpayers, given the stake that the government has in the American economy, given the stake that taxpayers have, given that we have already, through deposit insurance, made substantial commitments to our financial institutions, and given the stakes that all of us as taxpayers have in there being a viable mortgage market, there being a viable market in which we can get our car loans or car leases or financing of our credit cards.

These steps actually are not being done because people care about the welfare of shareholders or the welfare of big banks. These steps are being taken in order to support the flow of credit, because all of us as citizens are dependent on that flow of credit, whether it's to send kids to college, a car, a mortgage, what have you. We all need there to be a credit market that works, and that's what this is directed at getting started.

Loans to start soon

Lawrence Summers
White House Economic Adviser
History will render a verdict on these policies, and that verdict will be based on what happens to the income of American families over time, not based on what happens to the market over a day or a week or a month.

GWEN IFILL: Let's put this on its head. If you are a potential private-sector investor and you see that Congress wanted to claw back some of that AIG bonus money by imposing a 90 percent tax on the income, would that make you hesitate, thinking that maybe the government is going to change the rules on you, too, if you get involved in a program like this?

LARRY SUMMERS: I suspect that private investors will and should be very careful to understand the terms on which their investment is going to be made. They will seek the protection that they have legal rights, that whatever contract they enter into is a contract that will be honored.

That certainly is something that the Treasury and the Federal Reserve and the FDIC, the people who are implementing this program, will be very focused on providing, because it is important -- and this goes back to just what the president has been saying -- it is important that we respond to what has happened and what has happened when it has been wrong.

But it is also important that we provide a stable legal framework in which a financial system is able to function. And I think what we saw today from the market response to this program, from the comments of any number of participants in the market, from the take-up of the so-called TALF program, a precursor to this last week, is that the market recognizes that the president and his team are striking this balance in a very careful way and in a way that will provide them with the opportunity to restart this flow of credit in a way that will be constructive for everybody.

GWEN IFILL: So you think the market response today was directly connected to Secretary Geithner's announcement and that it was generally an endorsement of your policy?

LARRY SUMMERS: You know, Gwen, that's a good try. I think the response of any number of participants in the markets indicating interest in this program does speak to the fact that there will be interest in investing under it.

As to single days' movements in the stock market, we've got a very clear approach. We do not get panicked on days when the market goes down; we do not become euphoric on days when the market goes up.

History will render a verdict on these policies, and that verdict will be based on what happens to the income of American families over time, not based on what happens to the market over a day or a week or a month.

GWEN IFILL: Well, it should be said, you brought up the market. I was really following up on your invoking of the market's performance today.

So when do we begin to see the auctions for these assets begin? When does this program actually kick into action?

LARRY SUMMERS: Well, we'll be taking applications at the Treasury Department immediately. And my hope would be that you'll see the first actual contracts, the first actual loans within the next 60 days, perhaps sooner than that.

GWEN IFILL: Larry Summers, thank you so much for joining us.

LARRY SUMMERS: Thank you.