Disagreeable real property loans and mortgage-backed securities attached on the balance sheets of banks after the housing market collapse in the United States. Banks neglect to put them up for sale at very low prices and investors do not want to pay more.
A plan was formulated consisting of two parts: to purchase securities and loans from the banks.
The US government will give the biggest share of financial support to push investors from private sectors to participate. This will also widen low-cost loans and assurance to finance these purchases.
The Treasury will pay out US$75 billion to US$100 billion or S$113 billion to S$150 billion in order to commence the partnerships of both public and private sectors, taking the funds from the US$700 billion fiscal rescue fund.
The money will be supplemented with leverage to purchase toxic assets worth US$500 billion – roughly separated between loans and securities. This amount is expected to double to US$1 trillion over time.
For the mortgage-backed securities, a maximum of five investment executives would put up funds, with the government coping with them dollar-for-dollar. The Federal Reserve, the United States central bank, will be the one to provide loans tantamount to half the joint funds. The partnerships will propose payments for the securities, making a market and a price for assets through competition.
For the loans, the Treasury will be the one to provide 50% to 80% of the needed equity capital. The Federal Deposit Insurance Corporation (FDIC), the regulator of the bank, will bestow the partnership one to six times the sum of its joint capital.
Marketing these assets will allow banks to recommence normal lending and lessen uncertainty regarding the losses. This will make the banks to easily raise the capital and to payback bailout funds.
It will thaw out credit necessary to the US economy and make the financial system stable. Taxpayers will also make profits from these asset sales.
Tim Geithner, secretary of the Treasury was criticised after announcing the plan outlines on February 10 without answering tough queries of how it would exactly work. But he assured that he will do so soon.
After six weeks, the administration under US President Barack Obama has been very busy in formulating and asking Congress to create a detailed US$3.55 trillion budget plan and to formulate a proposed bill regarding residential rescue. They have also been struggling fires – from new bailouts to democrat rage on AIG bonuses. Secretary Geithner seemed to be incapacitated by not being capable to fill some of his important staff positions.