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tim-geithnerStocks surged all over the world with the announcement yesterday by Treasury Secretary Timothy Geithner that the Fed would buy back toxic bank assets. The news was greeted with applause (literally & figuratively) and the reaction from the market was profound. In particular, the Dow swelled by a whopping 497+ points closing 6.8% higher and representing the largest gain since late 08′. Two of the larger banks, Citigroup and Bank of America, saw their shares rise by more than 20%.

The plan, which is being referred to as the Public-Private Investment Program, is based on an initial investment of $100 Billion from the treasury, in addition to guarantees by the FDIC, to buy distressed mortgage securities currently on the banks balance sheets.

The impetus of the plan is to get private investors, speculators really, to buy the securities and support them in doing so in an effort to narrow the gap between what banks are willing to sell them at and what the market will bear.

foreclosureWhat’s curious about this plan is the apparent role reversal on the part of the banks in this particular case. Everybody knows that you buy low and sell high, especially bankers? These banks are being encouraged (forced…) to clear this debt from their balance sheet.  All of the major banks have received 10’s of Billi0ns of dollars as part of the bail-out. If you read Geithner’s tea leaves it’s clear that what is now required of them is to liquidate these “assets” for a onetime loss and to take the write down!

Ouch! Those just aren’t words that any banker likes to hear much less as it relates to their own assets. The banks’ hoped, apparently, to get the bail-out money (they got it) and then hold onto the depressed assets until the market returned, dump the assets and profit handsomely. Well, it doesn’t look like that’s the way this is going to go.

It will be interesting to see how much arm twisting will need to take place to get the banks to burn this crop in the field order to fertilize it for next season, so-to-speak.

(Excerpts taken from the Wall Street Journal 3/24)

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