- The Washington Times - Saturday, March 21, 2009

The federal government is preparing to announce early next week its plan for helping banks sell up to $1 trillion in toxic loan assets — a plan considered crucial to restoring the health of the banking system and economy.

The long-awaited program will rely on “public-private partnerships” to dispose of the currently unsellable sub-prime and exotic mortgage loans on the books of big banks like Citigroup and Bank of America, using a combination of financing from private investors, the Treasury, Federal Reserve and Federal Deposit Insurance Corp., according to industry and federal sources.

Private investors like hedge funds and private equity funds would be enticed into the program because of the availability of cheap financing provided by the Fed and the FDIC, which would borrow the money from the Treasury at rock-bottom interest rates.

The Treasury would also contribute some capital to purchase the loans, so if they appreciate in value both the government and the private investors would profit. Investors would not be expected to absorb any losses on the deals beyond the amount of cash they put into it, however.

Federal Reserve chairman Ben S. Bernanke has said the effort to clean up toxic loans and restore health to the banking sector will be critical if the economy is to enjoy a recovery this year. Without resolving the loan and banking problems, he and other economists say the chances of a lasting economic recovery are much diminished.

While the toxic loan cleanup program has been much anticipated in financial markets, it debuts amid dark clouds hanging over the Treasury’s bank bailout program. The possibility of getting new funding for the program any time soon seems remote, given the public furor and backlash in Congress this week over bonuses paid to the biggest bailout recipient — American International Group.

Also, banks and private investors have grown wary about participating in the bailout program because of stiff restrictions on pay enacted by Congress, including a move this week to claw back bonuses from employees at AIG and other banks. The hedge funds the government hopes will participate in the toxic loan program cater to some of the highest paid executives and wealthiest investors in the world. Moreover, they are secretive and jealously guard information about their pay, perks and profits.

Jeff Meli, analyst at Barclays Capital, said efforts to revive the defunct markets for mortgages and other loans will have a hard time getting off the ground because of fear the government will intervene and prevent investors from making profits.

“The government has recently altered the rules of several of the key programs and proposed altering others, to the potential detriment of banks and investors,” he said.

Investors already showed some reluctance to participate in a consumer loan sale program launched by the Fed last week, which is considered a prototype of the toxic loan program.

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