A little over a month ago, Treasury Chairman Timothy Geithner stepped up to a podium for a long awaited announcement about how the government was going to rescue banks. The stock market had been in turmoil for months, credit was as tight as it has ever been, and the nation was eagerly waiting for a sign of hope and a government plan to spark a recovery. Instead, the message was muddled, unclear, and lacked the specifics necessary to spark any confidence that the financial system was once again on a firm foundation.

Early Monday morning, Geithner was at the podium again. This time, his message was much more clear, and if the stock market is a guide, it was very well received. The Dow was up just under 500 points Monday, led by financial stocks on hopes that they would be able to remove toxic assets from their balance sheets. The assets would be purchased by a combination of private investors and the federal government in hopes of removing uncertainty from bank balance sheets and getting the credit markets moving again.

The stock market is not the only measure of success for the plan though, and there are some challenges and questions that remain unanswered. The biggest question is whether or not private investors will be willing to be a part of the solution. There is substantial risk to buying securities tied to mortgages, credit card debt, and other loans that could easily go uncollected in an uncertain economic environment like the one we’re in now. Investors have fled risky assets for the safety of government bonds and FDIC insured securities, it’s hard to imagine private investors suddenly lining up to buy these risky assets.

The other big challenge tied to this plan is that it’s impossible to know what the value of these troubled securities should be. Over 90% of mortgage holders in this country are still making timely mortgage payments, but there is no way of knowing which mortgages in these securities will default and which will eventually be paid in full. Banks have had to write down the value of these loans to between 30 and 60 cents on the dollar. If the results of the auction come in low, the value of securities not being auctioned off of balance sheets could have to be written down even more to reflect their lower perceived values on the open market.

The plan was well received, but the biggest question of all is simply whether or not the plan will work. Taxpayers are being given a lot of responsibility for stepping up and taking part in the historic bailout, but they also carry a portion of the risk. It may be months before we know for sure what the end result will be, but the optimism surrounding the plan is a welcome change after months of negative news.

If you enjoyed this post, make sure you subscribe to my RSS feed!

Tags: Bailout, Bank, mortgage, Toxic, Treasury

• Bank Rescue Plan Lacks Specifics
• Can You Get Bailed Out On Your Credit Card?
• Banks Complain To Government About Fees
• 2009 Bank Failures Surpass 2008
• A Record Number of Car Dealerships Close in 2008
• Citigroup Extends Help to Unemployed Homeowners
• Mark To Market Accounting Changes Favor Banks
• The Great Bank Consolidation