Bad Bank' Funding Plan Starts to Get Fleshed Out

The Wall Street Journal ^ | 3/3/09 | Deborah Solomon and Jon Hilsenrath

[marshmallow]

WASHINGTON -- The Obama administration, filling in some of the blanks in its bank bailout, is considering creating multiple investment funds to purchase the bad loans and other distressed assets that lie at the heart of the financial crisis, according to people familiar with the matter.

The Obama team announced its intention to partner with the private sector to buy $500 billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month. It's central to the administration's efforts to unglue credit markets, alongside a Federal Reserve program aimed at spurring consumer lending in areas such as credit cards and home loans that will be officially launched Tuesday.

No decision has been made on the final structure of what the administration is calling a private-public financing partnership, but one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.

These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

The public-private partnership grew out of the "bad bank" concept, an idea popular among some economists that would have required the government alone to buy up the troubled assets.

The Obama administration jettisoned that idea after running into the thorny issue of pricing.

[TommyDale]

Fleshed out, or flushed down?

[SoFloFreeper]

So what does this mean? Obama is going to buy a controlling interest in mutual funds?

I thought we were told when Bush wanted people to direct their own funds into the private market it was HORRIBLE.

Now Obama does it and things are peachy?

What a pile of tripe.

[q_an_a]

I am not sure what took so long, in the 80s the Resolution Trust was set up to take over all the bad real estate loans across the southwest. The big banks got bought by other banks, which the government made guarantees to insure they worked and then the Trust solf off the “bad properties”. In the end once little banks like Nations and Capital One bought billion dollar Texas banks or savings and loans for 10 cents on the dollar...they became big banks. The bad loans, purchased by investors, paid the cost of the program and some folks got very rich buying 100,000K properties for 14K, waiting for the market to turn and selling in 4-5 years for 50 to 75K. I thought that was what TARP was to do.