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Treasury Secretary Timothy Geithner has said he is working on a plan to remove so-called "toxic" assets from banks by having the government partner with private investors to create special funds. Analysts discuss the pros and cons of the strategy.
It's a good news, bad news story. Led by Citigroup, bank stocks have been trading higher for two straight days. At the same time, nobody can say what the billions in bundled mortgages weighing down sagging balance sheets are really worth.
The Treasury Department and the markets are struggling to determine the true financial condition of large banks holding bad debt, institutions like Bank of America, JPMorgan Chase, and others.
Treasury Secretary Tim Geithner confirmed yesterday he's working on a plan to remove so-called toxic assets from the banks by having the federal government partner with private investors to create special funds. Similar to Wall Street, the funds would be used as a market to trade toxic assets.
The government could potentially commit as much as $1 trillion toward that effort. Private investors would run the funds and try to attract additional private money. If the bad assets were later sold for a profit, both parties would earn money. But if they dropped in value, the government would assume most of the loss.
Geithner discussed the broad outlines of the plan on "The Charlie Rose Show" last night.
TIMOTHY GEITHNER, Treasury Secretary:
What this plan will do is to make financing from the government available, alongside public and private capital, so that we can get these markets open up again.
The reason why these markets are not moving now is because there's no financing available and no confidence in people's capacity to make judgments about ultimate losses.
And so, by providing financing, government leverage alongside public and private capital, we think we can make a meaningful difference in starting to open up these markets and starting to trade again.
CHARLIE ROSE, Host, "The Charlie Rose Show": You have private investors who are prepared to step forward and buy these toxic assets if — if…
If they're able to get financing from the government, because, again, that financing is not available now. So that's the — one of the kind of important things that governments have to do in a financial crisis, because, again, you know, financial crises reflect an unwillingness by the private sector to take risk because of uncertainty and things that they just can't do in the economy.
And that's why governments have to step in, in financial crises and take risks the market would otherwise not be prepared to make. So with financing, we're confident you're going to see private investors come in and put some capital to work to sort of unfreeze these markets.
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