by Catherine Perez

Created on: March 26, 2009   Last Updated: January 24, 2011

Back in 2008, the American house market bubble collapsed, bringing down in its path our whole economy. As a result, Banks have been plagued by toxic-assets that are threatening their financial equilibrium and it has hampered their lending capacity.

Toxic-assets is a term used to describe assets that have exposed their holders to large losses. It includes residential mortgage backed securities, collateralized debt and so on.

According to Banks and Financial Institutions alike the economic meltdown is a direct cause of those very assets and in order to bring back stability in the system, the issue need to be addressed.

The idea is that, because of those toxic assets Banks are not able and/or willing to extend any more lines of credit. By stopping the flow of credit, they basically brought the economy to a halt, and ultimately the country entered
Recession.

President Obama and Treasury Secretary Tim Geithner have designed a plan that is supposed to address that very issue. What is this toxic-asset plan and who is to benefit from it? The toxic-asset plan revolves around three steps:

The FDIC will able Banks to sell troubled mortgages to willing investors. The estimated amount of bad debt is of 1 Trillion dollars.

The Federal Reserve is to launch a program that will allow non-bank commercial lending to resume. Details of the terms are yet to be provided.

The Treasury plans to create five investments funds which will be buying those toxic-assets from the Banks.The Government offers to match dollar-for-dollar their investment and further more to extend them loan in order to maximize their leverage. Again, details are yet to be revealed.

In an opinion piece in Monday's Wall Street Journal, Geithner said the new program was designed to "resolve the crisis as quickly and effectively as possible at the least cost to the taxpayer. ... Simply hoping for banks to work these assets off over time risks prolonging the crisis."

But assuming that the plan works, who is to benefit?
The prospective beneficiaries of the plan are most likely to be the Banks, the hedge funds and the mortgagees. But ultimately I suspect that the Government's generosity towards the private sector will mostly serve the hedge fund industry and the banks.

Hedge funds are set to make huge benefits on the long term with very little exposure considering that they're only ask to put forward 3-5% of the equity capital.

If you look at companies such as Morgan Stanley (NYSE:MS), Goldman Sachs Group Inc. (NYSE:GS) or Wells Fargo and Company (NYSE:WFC) which have lost on average 50 percent of their face value, this plan is a God send. They not only will benefit financially on the long term but they will see their shares go up on the Stock Market. It is a win win situation.

Besides you only have to look at the massive financial rally that occurred recently to realise that Geithner has Wall Street's thumb up.
On March 23, 2009 Bank of America (NYSE:BAC) was up a $1.02 and Citigroup (NYSE:C) was up $1.51.

Private investors realised that by freeing their books from toxic-assets Banks could go back to profits. Therefore they once again consider the financial stocks as a sound investment.

But the question we should all be asking is: How is the tax-payer to benefit? What provisions have been set in place to guarantee a tangible monetary reward?

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