‘Bad bank’ plan to target $1tn in toxic real estate assets

US Treasury Secretary Timothy Geithner admits the strategy will ‘cost money, involve risk, and take time’, as he outlines plans to create a public-private investment fund to help banks get rid of their ‘legacy’ loans and assets, as well as expand the government’s lending scheme to include help for commercial mortgages.

Real estate executives welcomed plans by the Obama administration to create a $1 trillion public-private investment fund aimed at ridding financial institutions of their toxic real estate-related assets – as well as expanding help for commercial mortgage lenders.

US Treasury Secretary Timothy Geithner said today the investment fund – dubbed the “bad bank” – would start with an initial capacity of $500 billion, but would expand up to $1 trillion depending on the success of the programme. He said it would use “government capital and government financing to leverage private capital to help get private markets working again”.

Although the structure of the fund has yet to be finalised, Geithner said private firms and asset managers would help value the “real estate-related assets that are at the center of this crisis”.

Outlining the measures of the Obama Administration’s new Financial Stability Plan, Geithner also pledged to commit up to $1 trillion to supply new credit to consumers and businesses in a bid to “kick start” the secondary lending markets.

The lending scheme will expand the Federal Reserve's Term Asset Backed Securities Loan Facility (TALF), announced last November, to include help for small business lending, student loans, consumer and auto finance and commercial mortgages.

US lobby group, the Real Estate Roundtable, welcomed the measures saying it was a “positive step forward” for the commercial property industry. Roundtable chief executive officer Jeffrey DeBoer added that the expansion of TALF to “newly originated AAA securities backed by commercial real estate loans is a prudent and common sense reform that will have direct, positive effects for the economy”.

“[The US] Treasury is pursuing the right strategy now to help avoid a potential foreclosure disaster in the commercial real estate sector. With hundreds of billions of commercial real estate mortgages maturing this year alone and no functioning credit market, many people are concerned that borrowers will technically default.”

Geithner also said the Treasury would continue to inject additional taxpayer funds into banks, but the government would impose tighter restrictions including limits on dividend payments, acquisitions and executive pay.

“I want to be candid: this strategy will cost money, involve risk, and take time,” Geithner said.