Treasury Proposes to Have Wall St. Manage Bad Debt

By Steve Liesman, CNBC Senior Economics Reporter | 20 Sep 2008

Wall Street is being called upon to manage its own mortgage mess.

As part of the government bailout of the financial industry, the Treasury has floated a plan with industry executives that envisions the $700 billion in bad mortgage debts being bought by the government will be run by five to ten outside asset managers, CNBC has learned.

These managers will each run portfolios of up to $50 billion each, according to a source familiar with the plan. The portfolios will be amassed through so-called "reverse auctions" where the seller bids the lowest price it will accept from the government for buying up the asset.

The reverse auction is said to be a way to limit the cost to taxpayers. Those auctions will take place in $10 billion increments. The plan also answers one of the most pressing questions about the bailout: how to value the assets.

It was unclear how the Treasury would handle the problem of asset managers who might hold or otherwise have been invovled in the mortgage mess and whether those running the assets could bid for them.

Strict prohibitions for either could limit the list of possible investment managers or bidders for the assets. Without them, however, there could be inherent conflicts of interest.

A Treasury official declined to comment.

The plan to buy back $700 billion in mortgage-related debt is just one of a series of measures unveiled in the last two days as the Treasury and Fed decided the frozen credit markets signaled a growing storm that would engulf the economy.

The Treasury said on Friday it would siphon up to $50 billion from a fund established in the 1930s to conduct foreign exchange market intervention to backstop the rattled U.S. money market mutual fund industry.

This long-safe corner of financial markets, home to some $3.5 trillion of deposits, has increasingly appeared at risk of falling victim to the year-old credit crunch. Money market fund assets dropped by a record $169.03 billion in the week ended September 17 as jittery investors pulled money out.

The U.S. Securities and Exchange Commission got involved too, imposing on Friday a 10 trading-day ban on short sales of 799 financial stocks.

And the administration will step up a program announced this month to directly buy mortgage-backed securities in the market, and said Fannie Mae and Freddie Mac would also increase their buying to try to get credit flowing.

—Reuters contributed to this report.

Posted by Wintermute at September 21, 2008 12:55 PM