ROBERT SIEGEL, host:
From NPR News, this is ALL THINGS CONSIDERED. I'm Robert Siegel.
After a long wait, investors finally got some details today. The Obama administration outlined its plan to relieve banks of the toxic assets that are at the heart of the financial crisis. Most of those assets stem from real estate loans made at the height of the housing bubble. President Obama expressed confidence in the plan during remarks to reporters at the White House this morning.
President BARACK OBAMA: The good news is that we have one more critical element in our recovery, but we've still got a long way to go.
SIEGEL: Investors liked what they saw, too. The Dow shot up nearly 500 points. That's about seven percent. The administration's plan has the government partnering with private investors to buy up the toxic assets. And for more on that plan, I'm joined now by NPR's John Ydstie. John, first, how would those partnerships work?
JOHN YDSTIE: Well, the short answer is that private investors would put up a little money, and the government would put up a lot of money. And together they would hope to buy up about a trillion dollars' worth of these toxic assets from banks and other financial institutions. If these public/private partnerships make money, taxpayers and investors would share equally in their profits. If there were losses, they'd share equally in the small losses, but taxpayers would be on the hook for the large losses.
SIEGEL: And where would that government money come from?
YDSTIE: Well, there are two main programs. One would buy up mortgage-backed securities. It would use Treasury TARP funds and Federal Reserve loans. The other program would buy troubled individual mortgages, loans that haven't been securitized. It would use Treasury TARP funds and loan guarantees from the FDIC. That's the most well-defined program.
SIEGEL: Well, walk us through that more well-defined program, the one involving the FDIC.
YDSTIE: Okay, here's what would happen. Let's say Bank of America had a pool of nasty mortgages it wanted to get rid of. It would notify the FDIC and the FDIC would set up an auction. Private bidders, which could be other banks, could be individuals or even hedge funds, it would bid for the assets. Let's say the winning bid was $100 million.
Well, the private investors would put up about seven percent of that, $7 million. The Treasury would put up an equal amount, another $7 million. The rest of the purchase would be financed by loans that would be guaranteed by the FDIC. And those loans would cover about 85 percent of the purchase price.
SIEGEL: So about $7 million from the private investors, $7 million from the Treasury TARP program and $85 million in loans backed by the FDIC. It's a huge government contribution, how would the profits or the losses be distributed?
YDSTIE: Well, if there are profits, the government and the private investors share equally. If there are losses, the private investors and the government share equally in the losses up to 14 percent. If the losses go beyond that, they're essentially all absorbed by the FDIC.
SIEGEL: By the public side of it.
YDSTIE: Right.
SIEGEL: That's the program to buy pools of individual mortgages. What about the program that buys the more complicated mortgage-backed securities that we hear so much about?
YDSTIE: Well, the formula is somewhat different, but I think the gains and losses would be shared in a similar way.
SIEGEL: So why would the government be anxious to go into partnerships where they shoulder so much more risk of loss if the deal goes bad?
YDSTIE: Well, the alternatives for the government are even less attractive, according to Treasury Secretary Tim Geithner, who unveiled the plan today. Here's how he put it in an interview with the financial channel, CNBC.
Secretary TIM GEITHNER (Department of Treasury): You know, this is the best way, in our view, to protect the taxpayer. The alternative approaches, which have the government buying all the stuff, taking on all the risk under a balance sheet, would be much more expensive to the taxpayer. The alternative of letting it just sit there, let these assets just sit in the balance sheets of banks would risk creating a much longer, deeper recession.
SIEGEL: And private investors are ready to participate?
YDSTIE: Yes. Some prominent large investors have suggested that they say see opportunity here and financial markets certainly give thumbs up with the big rally today.
SIEGEL: Yeah, we'll hear from one of those investors in a moment. Criticism as well, though, of this program.
YDSTIE: Yeah. There was criticism. Most prominent among the critics, Paul Krugman, the Princeton economist, New York Times columnist and this year's Nobel Prize winner. He argues the government ought to just bite the bullet and take over shaky banks and sell off the assets. He's very skeptical these public/private partnerships will solve the problem.
SIEGEL: Thank you, John.
YDSTIE: You're welcome, Robert.
SIEGEL: That's NPR's John Ydstie. Transcript provided by NPR, Copyright NPR.
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