Geithner's Financing Fiasco

Geithner's Financing Fiasco

Daniel Indiviglio, 02.10.09, 07:05 PM EST

Treasury's plan to finance asset sales may not be enough.

WASHINGTON, D.C.--Treasury Secretary Timothy Geithner says he wants to involve private investment in the next phase of the government's efforts to stabilize the financial system. Doing so might not be as easy as he thinks.

The creation of a so-called "Public-Private Investment Fund"--a way to remove toxic assets from banks' balance sheets--is one of the few kernels of new information that Geithner revealed Tuesday while unveiling the Treasury's plan to bolster the financial sector. Details are sketchy.

On the surface, it seems like a pretty slick idea. Since the government cannot figure out how to value these assets, they will entice private investors to do so. One way to avoid the valuation problem is to put it on somebody else's shoulders.

Of course, some incentive must be provided to encourage investors to take on the task of valuation. That's no small task.

"If the pricing were easy, someone would have done it," says Donald Ogilvie of the Deloitte Center for Banking Solutions and a former head of the American Bankers Association.

Treasury officials have indicated they'll provide only the financing for investors to buy these securities. What Uncle Sam won't offer: guarantees on those assets or a share in any losses.

That means that investors still face the enormous risk of mis-pricing the assets. Ogilvie worries that overpaying could lead to losses in the financing the government provides.

The Treasury wants to create a fund worth $500 billion to $1 trillion. To do that, it will need to provide relatively inexpensive financing so that investors won't quickly burn through most of their cash to buy the securities.