Will the Treasury/FDIC re-direct investment capital towards bad assets?
"The US Treasury unveiled a $1,000bn plan on Monday to relieve banks of the toxic assets plaguing their balance sheets in hopes of restoring stability and confidence in the stricken financial sector.
The Treasury will put $75bn to $100bn of the original $700bn troubled asset relief funds (Tarp) voted by Congress last October, into a public private investment programme. The Tarp funds will be used as government equity and partnered with private funds to purchase troubled loans or securities. That public and private equity would be leveraged by credit from the Federal Deposit Insurance Corporation, in the case of loan purchases, and the Fed Reserve’s term asset-backed securities loan facility (Talf ) programme, in the case of securities.
The programme, which Treasury called an effort to 'repair balance sheets throughout our financial system' and to 'drive us toward recovery' is divided into two separate schemes. One targets ‘toxic’ credit securities and the other focuses on portfolios of more traditional loans deteriorating due to the recession. Through the plan, the government will generate $500bn in purchasing power, with the potential to expand to $1,000bn.
For toxic securities, the government will authorise up to five investment managers to raise equity capital with the government matching the equity dollar for dollar. The Treasury would also lend the joint venture fund up to 50 per cent of its equity in the form of senior debt. These funds would then bid for assets, with the private partner deciding the price. The five new joint venture funds would be able to draw on Fed Talf financing."