The Treasury Department's plan for buying up bad bank assets is another big risk for taxpayers, but a risk worth taking to get the economy going again.
Credit markets won't open up until banks can clear the losses from toxic mortgages off their books. The plan unveiled by Treasury Secretary Timothy Geithner offers a reasonable chance for that to happen.
Treasury would use $75 billion to $100 billion in taxpayer money from the $700 billion bailout fund approved last October to entice investors to buy up to $1 trillion in shaky assets held by banks, mostly mortgage loans. The Federal Deposit Insurance Corp. would auction the bad loans and, with the Federal Reserve, provide low-interest financing to subsidize the purchases.
The program should be attractive for investors, who would be asked to put up only $7 for every $100 worth of risky mortgages. If the plan works, private investors stand to gain the most.
The largest risk is borne by taxpayers. If the bank assets fall in value, the government would take by far the biggest share of losses.
There's the potential for a "here-we-go-again" moment in this plan with regard to executive compensation. The limits on compensation for recipients of the Troubled Asset Relief Program won't apply to these new investors.
If the private investors strike it big, it could lead to the same sort of public outrage that accompanied the AIG bonuses. Unlike the AIG situation, however, these investors would be rewarded for taking a gamble that paid off for taxpayers. Also, these investors aren't using bailout funds for survival, as AIG did.
Geithner may have turned a corner in public confidence with this plan. Even as many AIG executives were doing the right thing by returning bonuses, the stock market soared Monday upon hearing the details of Geithner's proposal. In February, when the treasury secretary couldn't provide specifics of this rescue, markets plummeted.
There are still many unanswered questions about this proposal. One of the biggest is whether banks will accept the prices offered for their troubled assets. The hope is that, even selling assets at a substantial loss, banks will see the value in clearing their balance sheets to attract new capital, easing lending.
Nobody is certain of the value of all the banks' bad assets, but it's believed to be between $1 trillion and $2 trillion. There's a possibility that, even with this significant risk to taxpayers, the plan still won't do enough to lift banks' burden.
If the plan doesn't work, one of the few alternatives left would be for Geithner to ask Congress for more bailout money. And that would be a tough sell, given the public's understandable frustration over the lack of accountability in previous bailouts.