Geithner's toxic asset plan involve a investor-government half-half investment on selected toxic assets in auction. The purchase will be financed in a 6 to 1 ratio. The leveraged position is guaranteed by FDIC. And the loan is non-course. Therefore, the risky position to the US government as a whole is the roughly the 7.5% partnership investment, plus the roughly 85% of leveraged guarrantee. The maximum loss to the investor is 7.5%, given the leverage effect, the return could be several times. The package must be widely welcomed by the capital. And it is reflected by the sharp rise in the stock market.
Many well structured financial plan is going to be prepared to extract the money from the gift package provided by the government. This plan is actually an attempt of further enlarging the US government's balance sheet by buying/guaranteeing the toxic assets. The only good is the invitation of private investment will help to price the toxic asset, while the private investor will be substantially rewarded.
If the toxic asset purchasing plan can really lead to a market price of those illiquid MBSs, how fast does the market pricing help the banking sector and thus the economy as a whole?
Can the value of the toxic asset correctly-valued? or distorted (overpriced) because of the government subsidy?
http://krugman.blogs.nytimes.com/2009/03/22/brad-delongs-defense-of-geithner/#comment-153095
