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Wall Street warms to ‘toxic assets’ plan

Geithner's plan aims to use public and private money to clean up $500 billion to $1 trillion in bad loans.

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“This new plan will be extraordinarily helpful to local and small-business lending,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore.

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Yet some analysts suggest it’s too early to know if the program will work to remove many of the legacy loans from the banks’ books. “I am skeptical, but hoping I am wrong,” says Douglas Elliott, a fellow at the Brookings Institution in Washington.

Will banks go along?

If there is a stumbling block, he says, it will be from the banks that are unhappy with the prices offered for their bad loans and securities. He estimates the assets to have lost between 30 cents to 60 cents on the dollar in face value. “In many cases the banks think the assets are worth more than the investors will pay,” he says. “They will take a big hit to bank capital if they have to mark them down.”

In an effort to persuade investors to pay more for the assets, the government has agreed to put a floor under the losses of 10 to 20 percent of what the investor puts up. In a briefing with reporters Monday, Geithner said the great risk is that investors will still not want to buy the assets, or, in his words, “the system will not take enough risk now.”

Some investors are concerned that Congress, still in an uproar over the bonuses at insurance giant and bailout recipient AIG, might impose some form of taxation on them if the deal appears too profitable. Last week, the House passed a 90 percent tax on bonuses given by companies who are receiving more than $5 billion from the taxpayers. In an effort to assuage investors, Geithner says there will be no compensation limits imposed.

Alternatives worse

In an opinion piece in Monday’s Wall Street Journal, he argued that his new program was a better idea than having the taxpayers buy the loans directly from the banks. “Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets,” he wrote.

He also said it would not work to just let the banks work the assets off their books over time, since it would could take a decade or more, similar to what happened to Japan in the 1990s.

It’s not clear if Geithner will have to return to Congress for additional funds. To start the program, most of the money – about $100 billion – will come from what is left of the $700 billion bailout fund. In addition, the plan counts on the Federal Deposit Insurance Corp. (FDIC), an independent agency of the government that backs bank deposits. “Turning to the private sector and the FDIC is an attempt to avoid Congress,” says Mr. Elliott.

Potential fund managers for the toxic-asset programs are supposed to apply to the government by April 10. The government will choose the managers by May 1.

– Staff writer David Cook contributed to this story from Washington.

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