Article Analysis from the Financial Times: Obama Administration and the Toxic Asset Plan
In the banking sector rescue plan presented on March 3rd of this year, Secretary of Treasury, Tim Geithner was forced to present the grim truth about the banking situation and the administration’s plan toward a slow recovery. This paper presents an extraction of criticisms and acclamations for the Obama administration’s recovery plan (OARP) based on articles published in the Financial Times.
At this point in the crisis the bottom line is there is no market confidence. Prior to the recent bailouts of automobile manufacturing companies, this nation had existed in a wealth bubble (Rappeport, 2009). The availability of credit, mortgage and loans made it easy for large investors and individuals to be complacent about the goings on in the banking industry. The crisis struck in surprise to many, and the onslaught of information regarding the practices that conveyed false security simply made the investing public distrustful of these institutions. What banking institutions need now is investment, yet investors are simply not willing to take the risk. The OARP creates a system where the government is able to intervene without taking control. By encouraging private investors through subsidized investment incentive, the government limits the risk to the private investor and increases the possible end profit.
The advantage of this recovery plan is that the government presents a solution to the problem without having to nationalize banking institutions. By providing an incentive to private investors, the government is able to open a window for banks to rid their portfolio of toxic assets while gaining new investments. The idea here is to keep the money flowing between investors and the banking institutions despite the gap between the rates banks are willing to let go of their toxic assets and the market value that private investors are willing to pay (Bond, 2009; Mackenzie, 2009; Guerrera, 2009 March 25). Tett (2009) explains that the need here is to encourage investment and to end the investment freeze. The faster banks are able to resolve their problems of toxic assets, the faster they can recuperate from bad debt cycle (Bond, 2009). The strength of the OARP is that it creates a risk-free and possibly profitable investment option for private investors who are willing to invest.
On the other hand, the OARP is not a solid rescue plan. There are many risks stemming from the government taking this action. An immediate negative effect would be the inflation resulting from the large amounts of money that the government would have to feed into market as part of the subsidy deal (Bond, 2009; Van Duyn, A. and Bullock, N., 2009). There is also speculation regarding the assumption that private investors would be willing to invest at all. With the recent poor performance of the debt system, toxic assets may have very little or no market value at all, as such investors may not be willing to purchase these assets (“Double or quits,” 2009, p.5; MacIntosh, 2009). Moreover the recovery plan does little to address the banking practices that led to its pitfall in the first place. The bidding war that may result from private investors competing for an asset may result to other innate disadvantages for the tax payer: (1) private investors may be more confident to overpay for assets because of the availability of the subsidy and non-recourse financing (Young, 2009; Bullock and Van Duyn, 2009), (2) Banks may overprice their toxic assets in an effort to regain losses resulting from bad debt because of the availability of government funds (Guerrera, 2009 April 3) and (3) in case such investments result in a loss then the government would have to bear the weight of all the loss.
The OARP is a recovery plan developed in an effort to present a quick solution to a financial crisis that threatens the economic sustainability of the entire country. While there are many unanswered questions regarding the practical applications of this plan and the large risk involved, it is a plan that could have positive results.
Bond, T. (2009, March 24). Markets have lost sight of the reason for state bank rescues. Financial Times, p. 22.
Bullock, N. and Van Duyn, A. (2009, April 3). US plan raises the pressure on junk bonds. Financial Times, p. 20.
Double or quits in Washington [Editorial]. (2009, March 24). Financial Times, p. 10.
Guerrera, F. (2009, March 25). Bank faces big write-downs in toxic asset plan. Financial Times, p. 1.
Guerrera, F. (2009, April 3). Bailed-out bank groups consider buying toxic assets from rivals. Financial Times, p. 1.
MacIntosh, J. (2009, March 25). Treasury resale may prove best option in crisis. Financial Times, p. 3.
Mackenzie, M. (2009, March 28). New bail-out, new divergence of opinion on state of play. Financial Times, p. 19.
Rappeport, A. (2009, March 13). Record falls in net worth of US citizens. Financial Times, p. 7.
Tett, G. (2009, March 18). Hope evaporates as confusion descends. Financial Times, p. 4.
Van Duyn, A. and Bullok, N. (2009, March 20). The tough task of reviving the securitized debt markets. Financial Times (UK).
Young, P. (2009, April 2). Why Geithner’s plan is the taxpayer’s curse. Financial Times, p. 11.
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