HispanicBusiness

The White House announced today its plans to team up with private investors to buy a possible $1 trillion of toxic assets in order to unclog the banks and the credit markets. Also called "legacy assets" by the Obama administration, 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. Investors' anxiety in turn increases, causing them to pull their money out of the markets.

So why would private investors want to buy toxic assets at all? Like junk bonds, legacy assets have often been repackaged so many times that their listed valued is actually lower than their estimated value. As market prices recover, the worth of toxic assets will rise, making them attractive to other buyers and the initial investors in this Public-Private Investor Program aims to profit. Yet there is no guarantee that these troubled assets will regain significant value. Investing billions and perhaps a trillion dollars this way is risky, which is why the administration decided to have the private sector control them instead of the placing the risk on taxpayers. However, the federal government will purchase half of the equity of each toxic asset, thus sharing either the pain or the gain that results.

So far, the markets have responded positively to the Public-Private Investor Program.