'Bad Bank' Funding Plan Starts to Get Fleshed Out - WSJ.com

These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

The public-private partnership grew out of the "bad bank" concept, an idea popular among some economists that would have required the government alone to buy up the troubled assets.

The Obama administration jettisoned that idea after running into the thorny issue of pricing. To help banks, the government must pay enough so that firms don't have to suffer additional losses from selling or writing down the value of other similar assets. But there is little public tolerance for overpaying with taxpayer money.

via online.wsj.com

Okay, so the government no longer has to pay banks directly for toxic assets, but has to subsidize other people until it becomes economically viable for them to buy the assets at a price high enough that banks don't have to write the assets off. So we still have a price floor -- the price at which banks can sell their assets without write offs -- but now the government won't have to pay that full price. Instead, investors will contribute some of the necessary capital in exchange for a crack at the upside. But how much risk will the government have to take on to induce them to enter?

Posted via web from Mhm.