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Tim and Barack's $1 Trillion Bank Rescue- Any Chance It'd Work?

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image of Timothy Geithner with Gordon Brown and Kevin Rudd by downingstreet at http://www.flickr.com/photos/downingstreet/In news just in, US Treasury Secretary Timothy Geithner has announced a US$1 trillion bank rescue package.

The plan, unlike previous rescues which basically pumps money to the financial institutions for their use, is targeted at the toxic debts that the troubled banks are holding.

Key to the plan is the participation of private institutions. The Treasury will use $75 to $100 billion as seed money and the US administration will bear the bulk of the risk and even provide low interest loans to any private institutions willing to take the toxic assets off the banks' books.

While the plan is finally announced after a long delay from February for the Treasury Secretary to come up with this. I think it is still short of details.

First off is whether they have asked any private institutions whether they are willing to purchase what is in effect mostly worthless assets even according to the President. No names were forthcoming in the announcement.

Second, using just $100 billion start off the cycle to buy $1 trillion worth of assets is very dicey. There is no way to estimate what is the demand for these 'assets' which may turn out to be more of a liability.

Third, it is ironic that the US government is now taking the role of AIG in the subprime crisis- guaranteeing the loan that private institutions will take to buy the toxic assets. When these private firms go under because of the toxic assets, the US government will have another problem on their hand.

Fourth, the fact that there are estimates that the toxic assets will ultimately be around a $2 trillion figure which even if the bank crisis plan succeeds will only solve half the problem. What about the other $1 trillion, Mr Timothy Geithner and President Barack Obama?

Simple solutions are better.

Guarantee the toxic assets, put them all under a central depository with all these assets still under the banks' accounts. Now tell the bank they no longer have the assets under their books, but they are supposed to pay at least 10% of their profits each financial year they make a profit after tax to pay off the toxic assets.

And charge them a holding cost on top of these for the toxic assets. If any of the toxic assets should pay off on its own, it contributes towards the yearly payment for the bank.

Each time they pay the sum, they are reminded of the lesson of the banking crisis of 2008. And they are likely to pay for it a long, long time. Allow for early repayment of the toxic assets. Sounds like a bank's plan :)

Use a bank's solution to solve a banking problem.

What do you think?

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