Bank Bailout

This morning, Treasury Secretary Tim Geithner unveiled that Public Private Partnership Investment Plan to remove distressed mortgage assets from bank balance sheets.  The market reacted quite favorably, raising the Dow Jones Index 6.8%.  The reaction on Capitol Hil was mixed.  What really matters is whether investors and banks will play ball.

Critics say the Treasury plan is too generous to private investors, and they're right.  Using Treasury's example, a bank wishing to divest itself of distressed mortgage assets could request the FDIC to auction those assets to private investors and to the Treasury for 84 cents on the dollar.  The sale would be backed by FDIC guaranteed private financing at a 6 to 1 leverage ratio with a 50%-50% equity stake from the private investor matched by Treasury.  So the investor and Treasury would each put up $6, and the FDIC would guarantee $72 of private financing.  If the private investor could sell those mortgage assets for more than $84, it would recoup half of the profit for putting up 7% of the deal.  That's pretty rich.