March 23, 2009 Markets rally as Obama details toxic assets plan Play video

(NECN: Peter Howe, Boston) - "The good news is that we have one more critical element in our recovery, but we've still got a long way to go, and we've got a lot of work to do,'' President Obama said Monday in announcing his newest plans to fix the nation's financial sector.

A month after Treasury Secretary Timothy F. Geithner announced a plan to have a plan, he and President Obama finally have details on cleaning up banks' "toxic waste," the fiendishly complicated investments like collateralized debt obligations built on mortgages that have gone bad -- and crippled lending.

It would commit $75 billion to $100 billion dollars from the $700 billion dollar bailout fund, in hopes of clearing out and winding down $1 trillion worth of mortgage waste on bank balance sheets.

Howe: Superficially, this is back to the future. Originally the whole idea of the Wall Street bailout announced last September by President Bush and Geithner predecessor Henry Paulson was: toxic assets. As Paulson said on September 19: "The underlying weaknesses in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded.''

The Obama spin is putting taxpayer money into so-called public-private partnerships. If banks auctioning off toxic mortgage bonds found willing buyers, private investors could buy the debt instruments by putting up just 7 percent of the price. The treasury would match it with 7 percent. And the Federal

Deposit Insurance Corp. or other government entities would provide low-interest loans for the last 86 percent.

Cornelius Hurley, who runs the Morin Banking Law Center at Boston University and was a former Federal Reserve counsel, said: "There are still details to come, and those details, I think, will tell whether it's going to work or not.''

Hurley said the biggest unanswered question is: Six months into this mess, what motivates buyers to finally bid on these toxic bonds ... and banks to sell them and fess up to huge losses?

"We know what the carrots are. They showed the carrots in terms of the investment vehicles and the government loans ... but what it was short on is the sticks. Those things that are going to induce or maybe even force banks to put pools of assets up for auction.'' Hurley said it's not clear what happens if banks put up mortgage debt for auction, bidders come forward,but then the banks refuse to sell, holding out for a rebound in the real estate market. If too many banks or debt holders take that approach, the Obama-Geithner plan would almost certainly flop.

Howe: Another big challenge is that the same big banks and investment firms the Obama administration is counting on to make the program work are the same kinds of entities that are getting beaten up every day about executive pay and bonuses. Will hedge funds and investment banks be scared to go in on public-private partnerships, worrying their salaries might be the next target of populist outrage?

Obama's guardely hopeful the new plan will lead to recovery. "It's not going to happen overnight. There's still great fragility in the financial systems. But we think that we are moving in the right direction.''