The Timmy Plan

The Treasury Department has announced its bank plan:

The federal government will use up to $100 billion in funds from the Troubled Asset Relief Program, or TARP, and capital from private investors in order to generate $500 billion in purchasing power to buy legacy assets, Treasury said in documents provided early Monday. The department noted that the program could potentially expand to $1 trillion over time.
The program has two parts. It will address both the legacy loans and the legacy securities clogging the balance sheets of financial firms.
Under the legacy loan program, banks will identify the assets they wish to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Eligible assets will be determined by banks, regulators, the FDIC and the Treasury Department.

Here’s the statement from Treasury.
Paul Krugman has described this as basically a rehash of the Paulson plan: “if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.”
The only thing I would add is that TARP has been such a failure that it may force banks to play ball since it will get Treasury off their back.

Posted by on March 23rd, 2009 at 7:53 am


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