The Hoo Haa surrounding Geithner's Toxic Assets Plan

What a boost.

The Dow is up 300 pts at print. The S&P500 is up about 4%.

And it looks like the market likes what they are hearing from Geithner on his Toxic Assets Plan that is aimed at removing bad assets from banks' balance sheets so that they will start lending again.

The plan that may cost up to USD 1 trn is actually not as complicated as it seems.

For friends who don't have the time to read up too much detail on the plan, allow me to attempt to break it down for your understanding.

1. the plan has two parts - one part deals with traditional loans (corporate and consumer loans etc) that are expected to be decline in performance due to the poorer economy and the other part, which was the bain of the whole crisis, deals with securities backed by mortgages, commercial real estate etc.

2. on the part on traditional loans - the Federal Deposit Insurance Corporation or FDIC for short will provide half the capital to private investors who want to purchase these loan assets, with the rest coming from their own coffers of course. The FDIC will also guarantee financing for the investor, if he wants to obtain it, up to 6 times the capital they have put in - this is in effect, a form of leverage.

(as these assets are more transparent, investors like pension funds and insurance companies are encouraged to take part)

3. on the part on securities backed by mortgages and commercial real estate - as many as 5 private asset managers will be given the mandate to raise private capital to buy these assets from the banks.

(I read in the FT it might take up to May '09 for choosing the asset managers so this might take more time to pan out.)

The Treasury will then match the private funds dollar for dollar and too, guarantee financing in the form of debt of up to 100% (notice this as compared to the above is substantially less leverage).

The benefits of the plan that are much touted are as below:
1. Banks' bad assets will be removed
2. The risks are now shared between private investors and the taxpayer instead of just the taxpayer
3. Efficient pricing on the assets comes as private investors are invited to price and bid for the assets - the banks benefit as well

Still confusing? I thought of an analogy for it.

Its like investing in horses, and using money from your super-rich grandfather who would love to see you own a horse farm.

Say you use your own money to invest in ponies, hoping they'd grow into strong horses and make you a return.

Then your grand-dad comes along and offers you cheap loans to buy more ponies and tells you to buy ponies from some farms that he controls.

So the ideal scenario some time down the road is that, your ponies grow up big and strong and you make money, and also you get to pay off your debts to your grandad.

It's supposed to be a win-win situation.