Private Sector: Buy Toxic Assets and Avoid Executive-Pay Legislation

As we have all seen, the U.S (and Canadian) Government has been buying up toxic assets in an attempt to clean up banks’ balance sheets. Well, they can’t do it all themselves anymore especially since there is a major problem in how to appropriately price these assets.

The new plan from Tim Geithner (U.S. Treasury Secretary) is to start a public-private investment fund.  The Treasury plans on hiring several investment fund managers that will be charged with finding money from the private sector to buy these toxic assets.  The goal of the program is to buy $1 trillion worth of these securities.  Also, by creating a potential market for these securities, it may also help with the pricing of these incredibly risky assets.  This is a big maybe.

This program will help deal with the credit crisis by giving banks more liquidity and clean balance sheets, which will hopefully foster more lending to businesses and consumers.  Hopefully, this will then allow for the rebound of a currently failing economy.

According to the Wall Street Journal, in an attempt to create incentive, the Treasury may not subject participants in the program to executive-pay rules imposed by congress.  Therefore if a firm has received funds from the government, but buys toxic assets, it may still avoid the tough pay restrictions.  This seems like quite the loop-hole.  I can already seeing money hungry executives buying these assets in the near future to then allow nice juicy bonuses to be paid out in spite of the bonuses coming from taxpayer dollars.