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THE GEITHNER PLAN

March 23rd, 2009

THIS is the best breakdown of the Public-Private Partnership announced today.

The two key elements of the plan are:

• Legacy Loans Program: a program to combine an FDIC guarantee of debt financing with equity capital from the private sector and the Treasury to support the purchase of troubled loans from insured depository institutions.

• Legacy Securities Program: a program to combine financing from the Federal Reserve and Treasury through the Term Asset-Backed Securities Loan Facility (“TALF”) with equity capital from the private sector and the Treasury to address the problem of troubled securities.

Here is the key to what this program is trying to do:

The equity co-investment component of these programs has been designed to well align public and private investor interests in order to maximize the long-run value for U.S. taxpayers. Specifically, while the plan is designed to help reduce the liquidity discounts contained in legacy asset prices in the near-term, the most important way to protect taxpayers is to ensure that the government is not paying more for assets than their long-run value as determined by private investors. Since TARP funds will be invested alongside private capital on similar terms, this reduces the likelihood that taxpayers will be overpaying. At the same time, taxpayers will have the opportunity to participate in the asset’s upside along with private investors.

The market's initial response was clearly positive. But a big question is exactly how the private funds pay a price they like without causing further damage to the banking system. We will see.

THE GEITHNER PLAN

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