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Some Experts Unsure Whether Federal Buy-Up of Bank Debt Will Work

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By James Bernstein

RISMEDIA, March 25, 2009-(MCT)-Yesterday’s announcement by Treasury Secretary Timothy Geithner that disclosed the details of the long-awaited and highly-anticipated $1 trillion plan to relieve the nation’s banks of the bad debt that has crushed lending and helped put the country into a recession has some economists and business experts unsure of the plans effectiveness.

While the Dow Jones industrial average, the Standard & Poor’s 500 and the Nasdaq all showed strong gains after yesterday’s announcement, some economists said a key challenge facing the plan is putting a value on the toxic assets that will be acceptable to both the sellers and the buyers.

“I have strong doubts about the plan working,” said Robert Goldberg, an adjunct professor of finance at Adelphi University and a former Wall Street investment banker. “You still have the problem of how you find the proper price for these assets. The investors don’t want to pay too much, and the banks don’t want to take any more losses.”

Geithner’s plan is the latest in a series of efforts by the Treasury, the Federal Reserve and other agencies to end the worst U.S. financial crisis since the Great Depression.

Geithner said he expects the latest plan to work. “This will allow banks to clean up their balance sheets,” he said in an announcement. “There is no doubt the government is taking risk. You cannot solve a financial crisis without the government assuming risk.”

The complex plan revolves around the government’s creation of a Public-Private Investment Program that will rely on financing from the Fed and debt guarantees from the Federal Deposit Insurance Corp. The plan is to finance as much as $1 trillion to buy the banks’ toxic assets, using $75 billion to $100 billion of the remainder of the Treasury’s $700-billion bank-rescue funds.

Some hedge fund managers are certain to see opportunity in the plan, said Andrew Schneider, managing partner and founder of HedgeCo Networks, consultants for hedge fund services, in Manhattan. “I think this is a step in the right direction,” he said. “There’s going to be some incredible opportunity that the smarter hedge fund managers that know the product and know the asset class and the marketplace for it will see. Hedge funds historically have been known for making money in marketplaces that are inefficient.”

But the program is likely to develop slowly, said Hugh Johnson, an economist at Johnson Illington Advisors in Albany. “Before private investors will commit to the plan, they have to do due diligence, and it takes time to understand what each toxic asset is made up of. And they also need to take time to understand what the financing is all about,” he said.

Investors may also be skittish about becoming involved in what amounts to another government bailout program after the wave of anger over bonuses handed out to executives at American International Group, said experts.

Investor fear may make it difficult for the program to get off the ground, said Irwin Kellner, chief economist for MarketWatch.com. “The whole plan is fraught with difficulties,” he said. “Cash is scarce. These hedge funds have plenty of money, but they’re not going to throw it into something as dubious as this.”

Copyright © 2009, Newsday, Melville, N.Y.
Distributed by McClatchy-Tribune Information Services.

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