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New Program Aims to Entice Private Investors to Help Banks

The Public-Private Partnership Investment Program will provide $500 billion for buying toxic assets, with the potential to grow to $1 trillion in purchases if successful, the administration said.

Speaking to reporters, President Barack Obama said the program will “allow banks to take some of their bad assets off their books, sell them into a market, but do so in a way that doesn’t just obligate taxpayers to buy at whatever price they’re willing to sell these assets, instead involves a public-private partnership that allows market participants who have every interest in making a profit to accurately price these assets so that taxpayers share in the upside as well as the downside.”

For example, in the case of a purchase of bad mortgage loans, the private investor would put up 6 percent of the cost with the rest provided by the government, with the Federal Deposit Insurance Corporation covering 84 percent of the cost with a loan and the remaining 6 percent coming from funds from the $700 billion bailout program, the Associated Press reported.

Some hedge funds and other investors have expressed reluctance to participate in the new program for fear that Congress will subject them to what they view as onerous restrictions on executive compensation.

Administration officials have said they believe the new program has the right mix to attract private investors and make a dent in the troubled assets on banks’ books. They also said they want to see how the new program fares before deciding whether to ask Congress for more resources.

The FDIC, which has experience disposing of devalued loans from taking over failed banks, will hold auctions for the pools of loans, which will be controlled and managed by the private investors with oversight by the FDIC, according to Bloomberg News.

President Obama said the new plan will work to unfreeze credit in tandem with his administration’s stimulus bill and plan to help homeowner’s avoid foreclosure. He also said it is critical to establish and enforce the proper financial regulations to prevent similar troubles in the future.

Listen to President Obama’s remarks on the new program:

While unveiling the plan, Treasury Secretary Timothy Geithner asked for patience, saying that the work needed to rehabilitate the embattled financial industry must proceed despite “deep anger and outrage” over executive bonus payments.

“Investors will share risk with taxpayers and the taxpayers will share in the returns along with private investors,” Geithner told reporters “We have seen – and I expect to see – a lot of interest from the private sector,” he added.

The government, he said, wants to provide private investors financial incentives to help set the price for these assets because “they have better judgment than the government could hope to make.”

A Treasury Department fact sheet said the administration plans to use $75 billion to $100 billion from the government’s existing $700 billion bailout program, known as the Troubled Assets Relief Program or TARP, for the new private-federal program.

Private analysts believe that with the $700 billion bailout fund nearly tapped out by capital disbursements to banks and lifelines provided the auto companies and AIG, there are only enough resources left to get the asset purchase program launched.

Mark Zandi, an economist with Moody’s Economy.com, estimated the government will need another $400 billion to make a sufficient dent in the bad asset problem, according to the AP.

Administration officials said they want to see how successful the new program is before deciding whether to ask Congress for more resources.

The new program is designed to “resolve the crisis as quickly and effectively as possible at the least cost to the taxpayer,” said Geithner in an opinion piece in Monday’s Wall Street Journal. “Simply hoping for banks to work these assets off over time risks prolonging the crisis.”

Asian and European markets rose sharply on word of the highly anticipated program, and U.S. markets followed suit.

The S&P 500 is still down about 10 percent since Geithner’s Feb. 10 outline of the Obama administration’s plans, which lacked many details.

As to whether the new plan has enough specifics, Geithner told reporters: “There are enough details to get it operational.”

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