Treasury Secretary Timothy Geithner's financial-rescue plan may be doomed if he doesn't offer low-cost loans to hedge funds and other investors to help them buy toxic assets weighing down bank balance sheets, Bloomberg reported.
Creating a "bad bank" or "aggregator bank" that would use federal funds to acquire and warehouse the assets, as some have proposed, would be costly for taxpayers and require too much government interference, say two experts on distressed securities who have pitched an alternative plan to officials.
John Ryding, chief economist at RDQ Economics LLC in New York, and Matt Chasin, chief operating officer of Sorin Capital Management LLC, a Stamford, Connecticut-based hedge fund that manages about $1 billion, say the Treasury Department should provide loans at commercial rates to investors for up to 50 percent of the purchase price of securities. The financing would be for as long as the maturities of the assets being acquired.
"One of the problems the banks have been facing is that the markets have forced artificially low prices on these assets because there's not enough financing available for buyers," said Ryding, 51, a former Federal Reserve economist who advises hedge funds. "There's a lot of capital looking for distressed assets, if hedge funds can get good financing."
Geithner sketched out a rescue plan on Feb. 10 that was short on specifics. It called for a "public-private financing component," with up to $1 trillion, that would enable financial institutions "to cleanse their balance sheets of what are often referred to as 'legacy' assets." He said it "could involve putting public or private capital side-by-side and using public financing to leverage private capital."
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