In conjunction with the Fed and the FDIC, the treasury department announces plans that will help buy up to $1 trillion dollars worth of toxic assets from the books of the banks. The goal of this program is to help banks lend again by offloading some of the toxic assets that just don’t have a market right now.
The Trillion Dollar Toxic Asset Purchase Plan will work like this:
Investors can bid on these toxic assets and the treasury department will match dollar for dollar for the bid. On top of that, the fed and FDIC will provide funding via loans to allow a leverage of 6 to 1. The end result is that for a $100 bid on any asset, the investor will put up $7, the TARP funds will put up $7, and the rest ($86) will be guaranteed by the fed and FDIC. The potential return on investment will be divided among the investor and the government (ie the tax payer).
The treasury expects that about $75 billion to $100 billion of the TARP funds will be allocated for this plan, which means that they also expects the private section to put up about the same amount. With the rest coming from the fed and FDIC via government loans, the total should be about $1 trillion of funding just to acquire these real estate loans.
There are talks that the big banks may not even want to sell those loans if it means that they are sold less than how much they’ve marked them down, but many think that even if there’s only a small participation, the added liquidity to these toxic assets will help tremendously.
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