Reports Say Insurance Financing of Toxic Debt Cornerstone of Financial Rescue Plan

The U.S. Treasury's financial rescue package includes up to $500 billion in insurance financing for the purchase of toxic assets and the expansion of a Fed lending facility backing a variety of consumer debt, according to CNBC.

Citing sources familiar with the plan, CNBC reported that the cornerstone of the plan is a private and public sector solution where both sides will provide insurance financing on toxic debt. The solution is hoped to jumpstart trading of frozen markets and spur price discovery on the debt.

While CNBC's Steve Liesman said he had not heard any mention of a "bad bank" or "aggregator bank" to assume some of the debt, which inevitably will be defaulted on, he speculated that the U.S. government will have to create a framework to deal with the problem.

The package also includes the expansion of the Fed's famous Term Asset-Backed Securities Loan Facility to provide between $500 billion and $1.0 trillion in support for consumer loans such as credit cards, mortgage backed securities, auto loans and student loans.

Given that the Fed theoretically has an unlimited balance sheet, this part of the program should not cost the taxpayer anything.

The program also promises $50 billion for foreclosure mitigation, the details of which will be unveiled at a later date, and additional capital injections for financial institutions.

By Erik Kevin Franco and edited by Stephen Huebl
©CEP News Ltd. 2009