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Investors May Need Incentives To Buy Toxic Assets

RENEE MONTAGNE, host:

One part of the Treasury Secretary's new approach would bring in private investors to help save the banks. NPR's Chris Arnold has more on that.

CHRIS ARNOLD: Many major banks are still crippled by bad investments that they have on their books. A lot of these are linked to all those crazy mortgages that got written in recent years where millions of people got into loans that they can't pay. Treasury Secretary Geithner says he wants to set up an investment fund to buy up a lot of those toxic assets.

Secretary TIMOTHY GEITHNER (Department of Treasury): By providing the financing that private markets cannot now provide, this will help start a market for the real estate-related assets that are at the center of this financial crisis.

ARNOLD: The details are still very fuzzy, but Geithner seems to want to use public money to entice private investors to put up money of their own to buy up these problematic assets.

Sec. GEITHNER: We're exploring a range of different structures and will seek input from the public as we design this program. But we believe this program should ultimately provide up to $1 trillion in financing capacity.

ARNOLD: Just how much of that trillion dollars the government would be on the hook for is a key question. The plan is sort of a new spin on what's been called a bad bank - that is basically a fund that buys up a lot of bad assets to get them off the bank's balance sheets. But here the private sector would help finance the effort.

Mr. MICHAEL LEVAS (Head, Olympian Partners): The government can't pay for everything.

ARNOLD: Michael Levas heads up a hedge fund named Olympian Partners. He says he'll take a look at the deal the government's offering when it comes out.

Mr. LEVAS: I think they're trying to make a cohesive effort in attracting the private investor community into this situation so that they can help. And I think that's what they need to do. I don't think that the government can just do this on their own.

ARNOLD: Right now, investors who might buy these assets are bidding extremely low prices. Levas says part of what's going on is that investors are afraid to buy, say, some securities linked to troubled mortgages because they can't turn around and sell them to anybody else.

I mean, that's part of the problem, there's no market. If you buy something right now you can't sell it.

Mr. LEVAS: That's exactly right. There is no market. I mean, it's just been really unbelievable. The liquidity in the market for this type of stuff has been really, really absolutely horrid, and that's what they really need to address.

ARNOLD: So, how does the government get the private sector to come in and get things moving again here when it's so far been unwilling to do that?

Mr. LEVAS: They're going to have to put some kind of caveat here to make it attractive, whether it's a guarantee, whether it's an ability to walk away.

ARNOLD: The government might loan a lot of money to investors. So, let's say a private investor put in $10 million to buy troubled assets, the government could loan them, say, another 20 million to buy more. That would magnify the investors' profits if they made money. But if investors really overpaid for the assets and had big losses, the government, it would seem, could lose a lot of money here.

Mr. SIMON JOHNSON (Economist, MIT): Wall Street owns the upside and the taxpayer owns the downside.

ARNOLD: Simon Johnson is an economist at MIT who runs the blog Base Line Scenario: Tracking the Financial Crisis.

Mr. JOHNSON: Think of it like this: you may not want to go to Las Vegas because you think the odds are tilted against you. But if your dad says, look, I'll give you a big loan, you go and gamble, and if things go well, you get to keep the upside, and if things go badly you don't have to pay back the loan or you don't have to pay back the full amount of the loan. That might be good for Las Vegas. I don't think that's going to be a good value proposition for the taxpayer.

ARNOLD: Now, here's something that confused a lot of people. In his testimony before lawmakers, Geithner actually said he wasn't envisioning the need for guarantees to protect investors, which seems to suggest that he wouldn't let people gamble with the government's money. But that's the whole point of this idea. The market isn't working by itself now - people don't want to buy these toxic assets at almost any price, so…

Professor JONATHAN MACEY (Law, Yale University): You got to do something to induce them to buy the assets. The government's going to have to provide something like a guarantee.

ARNOLD: Jonathan Macey is a law professor at Yale University who studies financial markets.

Prof. MACEY: And that's why there's so much frustration - is it a government guarantee or is it not? If it isn't, then what's the point? If it is, how much are we on the hook for?

ARNOLD: Macey doesn't like the idea of the government spending a lot of money on this particular intervention anyway. But like a lot of other people, he's eagerly awaiting more details.

Chris Arnold, NPR News.

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MONTAGNE: This is MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.
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