Private investors and the government would work together to buy bad assets to help financial institutions get back on their feet, under a plan unveiled today by Treasury Secretary Timothy Geithner.
The government will offer low-interest loans to private funds wanting to buy these assets-loans and mortgage-backed securities-to encourage funds to buy assets. Private equity firms and hedge funds are likely to be the main purchasers of these assets.
Geithner said the government would offer initially offer $500 billion in loans and eventually might offer up to $1 trillion.
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"Our approach shares risk with the private sector, efficiently leverages taxpayer dollars and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis, in a repeat of the Japanese experience," he wrote in an op-ed article published in The Wall Street Journal published today. "Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks and reduce uncertainty about the scale of losses on bank balance sheets."
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