We’ve been hearing the rumors for months. Somewhere out there lurked a plan to buy “toxic assets” from banks. Once this happens, banks will lend money, the credit crunch will ease, the economy will strengthen, and wolves will dwell with lambs. Well, maybe not the last part, but nonetheless, it seems the long-awaited plan has arrived.
The “Public-Private Investment Program” is designed to work alongside the previous bailout/economy-helping bills to stabilize the financial institution and get the economy back on track.
Before I get to the recently released details, here is a quick FAQ for background information:
- What are “toxic assets”? Basically, these are bad loans that banks have created and loaned out that are now defaulting – think subprime mortgages.
- Why do they need to be purchased from banks? These loans are holding the banks hostage from issuing more loans. Since they can’t unload these loans from their books, banks do not have any available capital to lend.
- Why shouldn’t banks be left to deal with their problem? That is a really good question and a fine point, but “their” problem has become “everyone’s” problem. Even though this bailout will assist those who helped get the economy into this mess, its goal is to everyone.
- Will this work? That is the million (or trillion) dollar question. No one knows for sure if this will work, but history shows it might. Sweden and Japan suffered similar economic meltdowns in the 1990s. The method that turned things around was the same – buy the toxic assets. Sweden acted swiftly and recovered in a few years. Japan tried letting the system work itself out and unknowingly ushered in “The Lost Decade.” After 10 years, the government finally bought the toxic assets and Japan’s economy began its recovery.
That brings us to the details of the Public-Private Investment Program. The initial details include?
- The government will use up to $100 billion in taxpayer funds to begin an initiative to purchase our own toxic assets.
- The idea is to create a market for these loans allowing the private investment sector to get involved looking to buy these toxic assets at a true market value that will in turn create a profit for the investor.
- Once the ball gets rolling, toxic assets would come off the banks books, capital will become more readily available, and the economy can start back up.
The idea is that “everyone” will work together to solve “everyone’s” problem. The initial reaction on Wall Street has been favorable as the Dow jumped 300+ points. What will Main Street think? Well, that remains to be seen. At least on paper, the plan looks good. The anxiety comes from knowing that just because it looks good on paper doesn’t mean it will work in the real world.
The idea of a sure thing on paper not panning out reminds me of something happening (or no longer happening as the case may be) at your local theater…
Watchmen made its debut as a limited series comic book in the mid 1980s and was a commercial success. It seemed only a matter of time before it became a movie. There were many attempts to bring it to a theater near you and after 20 years of development, the film was finally released. Much to the chagrin of the execs at Warner Brothers, the film is not performing well at the box office. While the hype and excitement was great, it fizzled out a few days after its theatrical release.
Hopefully Obama and Geithner’s plan to buy toxic assets won’t suffer a similar fate… anticipation… delays… release… initial success… then everything falls apart… If it works, it may just give us all something to smile about.
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services, Inc. and writer for “Blog Pertaining to the Acquisition of a Mortgage to Purchase a Domicile.” Dunwoody Mortgage Services seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. For more information about Dunwoody Mortgage and available programs, please visit www.dunwoodymortgage.net.
