by Calculated Risk on 3/02/2009 08:40:00 PM

From the WSJ: Funding for 'Bad Banks' Starts to Get Fleshed Out

The Obama administration ... is considering creating multiple investment funds to purchase the bad loans and other distressed assets that lie at the heart of the financial crisis ...

The Obama team announced its intention to partner with the private sector to buy $500 billion to $1 trillion of distressed assets as part of its revamping of the $700 billion bank bailout last month. ...

... one leading idea is to establish separate funds to be run by private investment managers. The managers would have to put up a certain amount of capital. Additional financing would come from the government, which would share in any profit or loss.

These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

... the government wants to encourage private investors to buy up the assets in a way that would come closer to setting a market price where no market currently exists.

By offering low interest non-recourse loans, these public-private entities can pay a higher than market price for the toxic assets (since there is no downside risk). This amounts to a direct subsidy from the taxpayers to the banks. It is amazing how many different ways they've tried to recycle the same bad idea.