Geithner on the Record: Toxic Assets

for the banking system so that banks have the cushion of capital necessary to lend and expand even if the economy goes through a broader — a deeper recession.

Now, today — today we’re announcing a innovative plan for helping to provide a market for the legacy assets that are a core of this basic problem in our financial system. Right now, you know, banks are still holding on to a large amount of loans that were made before the recession, during the four years in the run-up to the peak of the boom.

Because there’s no financing available to the markets, because there’s huge uncertainty about the path of the recession, because there’s a lot of uncertainty about how to value these assets, these markets are stuck. And to help unfreeze these markets, provide a mechanism for working through these problems, we’re announcing today a two-part program.

One piece is a financing mechanism to allow banks to sell pools of loans. One piece is a financing mechanism for investors to sell and purchase securities. Structures are similar, and let me walk through the basic parts of the structures. In each case we’re going to put capital alongside capital from private investors with financing from the government. So private investors will share the risk alongside with the taxpayer, and the taxpayer will share returns alongside private investors.

Used as a market mechanism for establishing pricing and value, that will help protect the government from overpaying for these assets and taking risks greater than we should. And it will help bring professional management to these things, and again, all with the objective of reducing risk to the taxpayer, improving our capacity –- have the market work with us to help get out of this.

As you see in the proposals, we expect to put enough capital on the table initially to help leverage or generate between 500 and perhaps up to a million of purchasing power for these programs.

Now, if you think about this alongside the capital program, this will help banks clean up their balance sheets; it will make it easier for them to help raise private capital; it will help provide a market for these legacy assets that will help reduce these liquidity risk premium markets, help reduce the risk that people see further downward spirals in these asset prices, and overall, help increase the lending capacity of the financial system and reduce credit spreads and lending rates.

Now, like any plan, you’ve got to consider them against the alternatives. One alternative is just to let this dynamic we now see across the system continue. Our judgment is that would result in the risk of greater deleveraging, a deeper credit crunch, greater headwinds for the economy going forward, and a longer, deeper recession.

Another alternative is to have the government come in and purchase directly these assets and hold those, manage them, and sell them over time. That would involve the government assuming much more risk than under this program; create much greater challenges for managing these

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