Will potential profits help lure the private sector to bank rescue plan?

Such action may lead some investors to walk away from future dealings with the government.

"Private investors are going to be very wary about going into partnership with the government given all the strange things coming out of Congress these days," said David Smith, an associate professor of commerce at the University of Virginia, counting himself among those who question if the plan will work.

Noting "deep anger and outrage" in America, Geithner said the administration is working with Congress to make the legislation more palatable before it heads to the Senate.

The new toxic asset program does not include limits on executive compensation for participants.

Risks for banks

Some analysts also said it's unclear if banks will be willing participants in the program if the private funds make very low bids on their assets. That will force banks to take even bigger losses, further weakening their balance sheets. "I don't see any incentive for the banks to sell unless they already have written down these assets aggressively," Smith said, noting that in prior situations in both the USA and abroad, governments have forced banks to sell their bad assets.

Christopher Whalen, founder of research firm Institutional Risk Analytics, said the usual buyers of securities and debt, such as hedge funds, don't have much money left because investors have withdrawn so much cash.

That means the only investors willing to buy these assets would be so-called vulture investors, who would want the securities at a steep discount. In that scenario, banks would balk at selling and recording big losses.

At the same time, funds don't usually have the kind of staff that is required to manage a portfolio of distressed assets. "These assets will have to be decomposed and liquidated, and it's a very costly process that not too many investors have the expertise to do," Whalen said.

But some investors appear to be waiting in the wings to get in on the government program.

"You have many vultures circling the carcass," said Jeff Matthews of hedge fund firm RAM Partners. He notes the plan puts the hedge funds and other private buyers in the role they do best, which is "kicking the tires" of the investment and determining what price to pay.

"The hedge fund makes money, the government makes money," he said. "The government becomes a partner with smart buyers who want to make money for themselves."

Cathy Vann, president and owner of Ontra, bought bad real estate loans and assets from the government during the savings and loan crisis when more than 700 banks were seized by the FDIC. She has formed a partnership called USA Recovery Group with eight other financial firms that work with the government to try to profit from bad loans.

"We will look for at least 20 to 25 cents (on the dollar) returns on these assets. Otherwise, it isn't worth the trouble," Vann said.

Barry Fromm, CEO of Value Recovery Holding, was one of the lead contractors working with the FDIC buying up bad assets during the savings and loan crisis and said he also looks forward to bidding on the assets.

"We already do this kind of work — we have debt collectors, real estate specialists, lawyers, brokers and appraisers — all ready to start working with the government," Fromm said.

Page
  • 1
  • |
  • 2
  • |
  • 3
  • |
  • 4
Join the Discussion
You are using an outdated version of Internet Explorer. Please click here to upgrade your browser in order to comment.
blog comments powered by Disqus
 
You Might Also Like...