Wanted: Private buyers for toxic assets. See Uncle Sam

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To rid banks of their toxic loans, the Obama administration apparently wants to rely on purchases of those assets by private investors -- but with the government’s help.

Whether those investors will step up will depend on how favorable Uncle Sam makes the terms. And the better for them, conceivably, the worse for taxpayers.

Treasury Secretary Timothy Geithner is set Tuesday to announce the administration’s plans for Phase 2 of the financial system bailout.

The White House had been looking at creating a government-run ‘bad bank’ to vacuum up toxic assets. But that apparently has been judged to be too expensive, at least in terms of initial outlays.

So a central element of the new plan reportedly calls for the government to offer some level of guarantee to hedge funds, private equity firms and other investors that agree to buy troubled assets from banks. For example, the Treasury could put a floor under the assets, ensuring that investors’ losses couldn’t exceed a set amount.

Purchases by private investors could help banks dispose of rotting loans that have long clogged their balance sheets, freeing them up to attract fresh capital, boost lending and spur the economy.

The administration’s concept ‘is pretty attractive,’ said Steven Persky, chief executive of Dalton Investments, a West Los Angeles-based hedge fund firm that launched a fund focusing on distressed residential-mortgage securities last summer. . . .

‘If they’re doing things like guaranteeing a floor or providing very cheap non-recourse financing, that will be very effective in terms of [coaxing investors into] buying securities and starting to unfreeze the system,’ Persky said.

The success of the new plan will rest in part on whether on the government can persuade investors that it will stick with the idea, and won’t switch gears as it has with other bailout efforts since last fall.

‘What’s necessary is a sense that the rules are going to be reasonably constant,’ said Tad Rivelle, chief investment officer at Metropolitan West Asset Management in L.A.

What’s unclear is how much this plan might ultimately cost the government, and therefore taxpayers.

A key risk is that the plan could help a relative handful of private investors pick up appealing assets at favorably cheap prices, while leaving the government with all the dreck ‘and taxpayers with all the losses,’ said Julia Whitehead, president of Whitehead Miller Advisors Inc.

-- Walter Hamilton