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Financial bailout expected to rely on private investors

Treasury Secretary Timothy Geithner's plan reportedly limits the losses of firms willing to buy bad loans to lighten the woes of banks.

February 10, 2009|Walter Hamilton and Maura Reynolds

NEW YORK AND WASHINGTON — To rid banks of their toxic loans, the Obama administration apparently wants to rely on purchases of those assets by private investors -- but with the government's help.

Whether investors will step up depends on how favorable Uncle Sam makes the terms. And the better for them, conceivably, the worse for taxpayers.

Today, Treasury Secretary Timothy F. Geithner is set to announce the administration's plan for Phase 2 of the $700-billion financial system bailout enacted in the fall.

Administration officials say the plan will have programs to clean up bank balance sheets, restart lending to consumers and businesses and mitigate home foreclosures for creditworthy borrowers.

To limit taxpayers' exposure to risky assets, Geithner is expected to outline what officials are calling a public-private partnership.

The initiative will "bring the full force of the federal government together in partnership with the private sector to stabilize our financial system and open up the flow of credit that families and businesses depend on to keep our economy strong," an administration official said.

In a news conference Monday evening, President Obama, providing no details of the revamped plan, suggested that the goal was to restore confidence in the financial system.

"Ultimately the government cannot substitute for all the private capital that has been withdrawn from the system," he said. "We've got to restore confidence so that private capital goes back in."

The White House had been looking at creating a government-run "bad bank" to vacuum up toxic assets. But that may have been judged too unwieldy or expensive, at least in terms of initial outlays.

So a central element of the new effort reportedly has the government offering some level of guarantee to hedge funds, private equity firms and other investors that agree to buy troubled assets from banks. For example, the Treasury could put a floor under the value of the assets, ensuring that investors' losses couldn't exceed a set amount.

Purchases by private investors could help banks dispose of rotting loans that have long clogged their balance sheets, freeing them -- in theory -- to attract fresh capital, boost lending and spur the economy.

The administration's concept "is pretty attractive," said Steven Persky, chief executive of Dalton Investments, a West Los Angeles-based hedge fund firm that launched a fund focusing on distressed residential-mortgage securities last summer.

"If they're doing things like guaranteeing a floor or providing very cheap non-recourse financing, that will be very effective in terms of [coaxing investors into] buying securities and starting to unfreeze the system," Persky said.

The success of the new plan will rest in part on whether the government can convince investors that it will stick with the idea rather than switching gears as it has with other bailout efforts since the fall.

"What's necessary is a sense that the rules are going to be reasonably constant," said Tad Rivelle, chief investment officer at Metropolitan West Asset Management in L.A.

What's unclear is how much this plan might ultimately cost the government, and therefore taxpayers.

One fear is that the plan could help a relative handful of private investors pick up appealing assets at favorable prices, while leaving the government with all the dreck "and taxpayers with all the losses," said Julia Whitehead, president of Whitehead Miller Advisors Inc.


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