Thursday, March 26

A History of Toxicity

In response to this post, I found this short Q&A from the Associated Press which I thought gave a little more explanation about what toxic assets are and how Geitner's plan will remove them from bank balance sheets.

What are toxic assets?
Toxic assets are, mostly, the investments backed by risky subprime mortgages that are held by the larger US banks and that have lost value. They hang like shackles from the banks' feet, dragging down their balance sheets and their fortunes.

It started in early 2007, when the mortgage crisis hit and defaults on subprime home loans, those made to borrowers with tarnished credit histories, began to climb. That gutted the value of the mortgage-backed securities---subprime mortgages bundled and sold on Wall Street to investors---held on the books of the big banks.

When the banks---such as Citigroup Iinc., Bank of America Corp, and JPMorgan Chase and Co.---started writing down the value of the securities, they reported billions of dollars of losses. Their capital eroded and they didn't have the money to make loans. Credit dried up. Banks large and small foundered and failed. The crisis was in full throttle.

There now is an estimated $2 trillion in bad assets on banks' books.

How will the new plan for getting toxic assets off banks' balance sheets work?
It's what the government calls a public-private investment partnership, with the goal of scooping up about $500 billion, and eventually $1 trillion, in toxic assets. The government will put in $75 billion to $100 billion taken from its $700 billion financial bailout program.

For every $100 in bad assets being purchased, private investors would put up $7, to be matched by $7 from the government. The remaining $86 would be covered by a government loan, provided in many cases by the Federal Deposit Insurance Corp.---the same folks who provide insurance to make sure depositors don't lose all their money when a bank fails.



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