Investors snapped up riskier assets earlier this month after the U.S. Treasury unveiled a public-private plan for buying as much as $1 trillion in bad debts on March 23, 2009. Will this clear the way for banks to get back into the business of lending?

The plan, known as the Public-Private Investment Program (PPIP), gives government help to private investors looking to buy loans and securities from banks. But, according to Reuters' reporter Dan Wilchins in his article, "U.S. toxic asset plan seen helping big banks," these banks are most likely to sell assets they have already written down substantially. "That typically means bank loans acquired from another bank, or securities portfolios, two classes of assets that are abundant at some larger banks, and in short supply at smaller banks."

What is a toxic asset?
Toxic assets are basically loans and mortgages from banks that have little hope of being repaid. Recently, these assets have been typically blamed on the subprime mortgage crisis, in which borrowers were approved for the loans despite being financially unfit to pay them back. As the assets continue to depreciate in value, banks become less and less able to give loans to qualified borrowers, which contributes to a credit market freeze.

On March 23, the Obama administration offered a raft of incentives for private investors to help rid banks of up to $1 trillion in bad debt that have plugged up the credit markets and plunged the world economy into crisis. Earlier in the month the U.S. Federal Reserve announced a program to purchase long-term U.S. Treasuries as well as mortgage agency debt in a bid to bring down borrowing rates in the housing Market.

Could this be the push to get money flowing again and clear the way for lending? Reuters reporter Kevin Plumberg reported that "Removing bad loans from the balance sheets of U.S. banks, which have kept financial institutions from lending more, has been viewed by economists as essential before a recovery could begin."

"However," he added, "questions lingered as to price of the highly illiquid assets, fears about the ballooning federal deficit simmered as the stock market rally persisted, and the fate of Wall Street bonuses." But banks are most likely to sell assets they have already written down substantially. That typically means bank loans acquired from another bank, or securities portfolios, two classes of assets that are abundant at some larger banks, and in short supply at smaller banks.

The program will provide government financing for private investors to buy loans and securities. The PPIP will likely generate up to $700 billion of funds for buying loans, and up to $400 billion for buying securities, Barclays Capital Strategist Ajay Rajadhyaksha wrote on Tuesday, March 24th.

Ultimately, the goal of the program is to clear banks' balance sheets so they can afford to start lending again.

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Sources:
Plumberg, Kevin, "Asia Stocks at Two-month High on US Bad Debt Plan," Reuters. March 23, 2009.