The US Government is to inject an initial US$75 billion to US$100 billion from the original US$700 billion bank bailout fund into two separate schemes. The money will hopefully be matched with private capital and leveraged to buy the most toxic assets held by banks, as well as illiquid secondary mortgage assets.
Now I’m not an economist, or a lawyer, or even an active investor, but isn’t this exactly what got us into the trouble we are currently in? People without enough money (be it individuals or banks), buying crap assets with leverage? How is passing the parcel going to help?
If the buyers of these toxic assets buy them for fair value (pennies on the dollar), then the selling banks will collapse. If they buy them for inflated values, then the buyer will take a huge loss, or (more likely) will list them on their balance sheet for more than they are worth. Sound familiar? Seriously, can someone explain to me how this works?
I can understand the government buying the crap assets for inflated value, taking the hit, then slowly selling them off over decades to recover as much as possible from them, but don’t understand how private institutions can do the same. If they could, then why is there any problem with them holding toxic assets in the first place?