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To lure buyers to toxic assets, Geithner lowers their risk

March 23, 2009 |  3:00 pm

The stock market's wild enthusiasm for Treasury Secretary Timothy F. Geithner's bank toxic-asset-disposal plan shows some investors believe it will work wonders to ease the banking system's financial woes.

But at what additional price to the taxpayer, and at what additional benefit to Wall Street?

First, on the hot-button issue of the moment, Geithner made clear that big investors that partner with the government to buy troubled assets would not be subject to federal oversight of what they pay their employees, except in the case of banks that also have gotten government aid.

From the Q&A with reporters:

Timgeithner Q. On the executive pay parts of this, the plan is to have passive investors not subject to that. But what about the asset managers?  Will they be subject to any pay restrictions?

Geithner: "I'm going to answer this carefully.  The basic answer is no.  If you're already an institution that's received TARP assistance, then you would be covered by the conditions -- the range of conditions that will apply to people who receive capital from the government.

"But these programs are different programs.  These are generally available programs.  They're designed -- like our housing plan, like the small business plan -- to get these broader markets working again.  And for those reasons the [compensation] conditions will not apply to the asset managers and investors in the program."

Despite the public outrage over the American International Group bonuses, the Obama administration knows that any attempt to rein in pay at firms (including hedge funds) that step up to buy or manage bank assets would almost certainly make the plan DOA.

As for the risk-to-reward ratio for the investors that participate, Geithner acknowledged that the government's capital contribution toward asset purchases, and the easy financing it will provide to private investors, substantially limited the investors' risk. Here's how the question was put to him today, and how he answered:

Q. Looking at the example you give in the fact sheet -- the first program -- you start with talking about $100 in bank loans, but the private investor only has to kick in $6 for -- seems to be on the hook for $6 at the end of the day, and the FDIC guarantees between there and whatever was paid for the bad loan.

Do you think a person outside this room, outside the Beltway, looking at that would feel like that's a -- you know, you've gotten a good deal by getting someone to kick in $6 for a loan that is valued at a $100, that's being purchased for $84?

Geithner: "I'm very confident you and your colleagues will do a good job of framing this thing -- (laughter) -- but let me just come back to the basic point. Okay? The point is, relative to what? What our job is, is to try to fix this problem in our financial system at least cost to the taxpayer and ways to get the incentives right so we can have private capital come in and not have the government do all of it.

"And the alternative strategies would have the government either taking on all that risk ourselves, having all those losses on our balance sheet -- or, sitting back and letting this process of deleveraging continue to weigh on the American economy, pushing viable businesses closer to the edge, where they have to shrink their businesses to get through this. And that's not an alternative we're prepared to support.

"The key thing is, again, that  . . . people have to compete for the right to get access to financing in this context and they have to put money at risk for it to work."

As for taxpayers' potential reward, Geithner of course couldn't quantify it. That will depend on how smart the investors are about buying the assets and collecting on them over time or selling them later to another investor. Taxpayers won't know what they've earned, if anything, for a long time.

Q. Can you clarify under both plans who is actually holding the assets at the end of the day, and explain to taxpayers what the upside is to all of that?  How are they going to share in the upside of this program?

Geithner: "These funds -- purchase assets -- they're managed by professionals who know how to do this for a living.  If there is a return to these over time, which we expect there will be, taxpayers will share in that return.  So taxpayers are getting to take the benefits of providing this financing to the market.  Now, of course investors will share, too, in that return, as you would expect.  That's the simplest way to describe it, I think."

-- Tom Petruno

Photo: Treasury Secretary Timothy Geithner. Credit: Ron Edmonds / Associated Press