Ask the Geek: Bank Rescue Plan

Q. How is this bank rescue plan supposed to work?

A.  The basic idea is that if the big banks can sell off their bad assets, they can function again. The banks have known this but can’t find any buyers. The government is bringing buyers to the table by sweetening the deal.

In one part of the program, big investors can buy toxic assets “legacy loans” with some of their own money and a lot more of the government’s.

In the other part, a handful of really big funds will be allowed to buy “legacy securities” – big bundles of repackaged loans – by putting up $500M each. The government will match that with $1 billion more through a special fund that has been closed to private firms until now.

Some of that $1B would be nonrecourse, meaning the funds are protected if they default. The funds get to cheaply buy just the best assets with borrowed money and no risk of imploding. So, they stand to make an absolute killing. Thus, Wall Street likes the plan.

However, the plan still might not save the banks, which will be left with the assets the funds don’t want. And if the banks ultimately fail while the managers of those big funds clean up…well, start selling pitchforks to the mob, cuz those AIG bonuses will look like change in the sofa cushions.

Have a question?  E-mail me at this address or use this form.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
This entry was posted in Ask the Geek and tagged , . Bookmark the permalink.

Comments are closed.