Treasury, private firms finally tackle banks' toxic assets

WASHINGTON -- The Treasury Department on Wednesday announced a significant step in a long-awaited program to buy banks' toxic assets in a bid to unlock frozen credit markets. But the initiative has been downsized and some analysts question its effectiveness.

Treasury said it will kick in up to $30 billion to buy a total $40 billion in mortgage-backed securities in partnership with nine funds that would raise money from private investors. The department on Wednesday announced the names of the funds, which it selected from more than 100 applicants.

The funds will invest up to $10 billion in cash that Treasury will match with $10 billion. Treasury will supply an additional $20 billion in loans. Each fund has up to 12 weeks to raise at least $500 million. Treasury says purchases could begin next month.

When the government announced the program in March, it said it would commit up to $100 billion from the $700 billion financial rescue plan to buy up to $1 trillion in bad assets, including loans. Of that, $50 billion would go toward mortgage-backed securities, with additional investor money and other funds combining to scoop up as much as $500 billion in troubled assets.

Asked about the smaller scope of the initiative, Treasury spokesman Andrew Williams said, "We feel this is appropriate sizing" in light of improved economic conditions. He says the government's investment could be ramped up if necessary.

During the housing boom, banks bundled mortgages into securities and sold them to investors. But when the real estate market tanked and foreclosures skyrocketed, the value of the securities plunged and trades came to a virtual halt. With the assets stuck on their books, banks and financial firms had little capital to lend to consumers and businesses. Many banks have at least partly written down the value of the securities.

The government hopes that the public-private partnership funds can establish a price for the securities, sparking sales.

But because there are more than $2 trillion in toxic assets on banks' balance sheets, IHS Global Insight analyst Brian Bethune says the program will not be enough to jump-start the market for those assets. "Most of these will be boutique transactions," he says.