What a great day, the Dow was up 6.8%! The financial markets like the plan unveiled by secretary of the Treasury Tim Geithner this morning. In essence, the toxic assets will be transferred from the financial institutions balance sheets to that of individual and institutional investors who are willing to buy a share of these toxic assets in partnership with the government. Basically, the program will create a market that currently does not exist, so that these assets can be purchased by long term investors willing to take the risk. Many individuals will end up owning some of these assets, without knowledge, through their retirement plans as well as through ownership of equity and fixed income mutual funds.
The losses currently held by banks will be transferred from a few institutions to millions of investors who will end up sharing a small portion of the losses. The five or six managers who will be responsible for managing these assets as they are transferred to investors will benefit by generating new investment management business, the banks will benefit by getting a clean, toxic asset free, balance sheet to start lending once again, and even though many consumers will end up owning some of these toxic assets individually, in some cases without knowing, consumers will also benefit once the banks start lending again.
I believe this plan may actually solve the current bank crisis. It will take a few months to execute, and of course, there must be institutional and individual investors willing to buy these toxic assets. But in the end, the banks will be given a fresh start. Therefore, the plan may work! The banks will end up in great financial condition to make proper loans. Hopefully, financial institutions will go back to making loans to qualified borrowers who can afford to pay back their loans!
It is still early to declare victory, but so far, this is the best alternative I’ve heard. Much better than creating a government bank just to hold the toxic assets. In the end, we will still have to deal with inflation, unemployment, and the housing market; but a guess the Fed and the Treasury Secretary will have to deal with that latter. What are your thoughts?
