6. How much of a dent does $1 trillion put into the toxic asset problem? Zandi estimates that there are between $2 trillion and $2.5 trillion of problem assets on the balance sheets of U.S.-based financial institutions. That means even if the program succeeds in sponging up the full $1 trillion, there will still be a massive amount of toxic assets out there. But if the program proves successful, the Obama administration can always go back to Congress for more cash to expand it, he says.
Dean Baker, the co-director of the Center for Economic and Policy Research, argues that removing toxic assets alone won't solve the banking crisis. Higher delinquencies for commercial loans, credit cards, car loans, and student loans will trigger additional problems for lenders whether they get rid of these assets or not. "[Loans] are going to go bad both because it is a real bad economy [and] also because people don't have the backdrop of their housing equity like they would have in other times," Baker says. "[The Obama administration's] thought is that they are going to get banks back on an even keel, but it's extremely unlikely."
[See Mortgage Delinquency Rate Record High: 4 Things to Know.]
7. As a taxpayer, should I feel good about this plan? Zandi says the plan is sound from a taxpayer's perspective. "There's nothing good about any of this," he says. "[But] we're making the best of a very bad situation." However, Pete Kyle, a professor of finance at the University of Maryland, argues that by financing the purchase of these highly illiquid assets, the administration is sticking taxpayers with a huge risk. "There is a really good chance that the government will lose a lot of money on the loans because they will not be repaid," Kyle says.
8. When will the program get moving? A plan this sweeping and complex as this will take some time to get off the ground, so banks won't be able to unload these assets right away. "Implementation seems likely to be at least a few months off, given the time required to start other such programs," economists at Goldman Sachs said in a report.
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Kapt. Blasto of KY 12:42AM August 20, 2009
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