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Government plan to buy bad debt from banks may come next week: CNBC

By Greg Morcroft, MarketWatch
Last update: 6:18 p.m. EST Jan. 27, 2009Comments: 53
SAN FRANCISCO (MarketWatch) - Shares of big banks including Citigroup Inc. and Bank of America jumped during late trading Tuesday after a report that a government plan to buy toxic assets from the industry may be unveiled next week.
The Obama administration is close to deciding on a plan to purchase non-performing and illiquid assets from banks and the proposal could be announced early next week, CNBC reported late Tuesday, citing unidentified industry sources.
The so-called "bad bank" plan, would address the key problem of how to price the assets by using a model-pricing mechanism, CNBC said.
The model would take into account the government's ability to hold the assets, even to maturity, and pay for them with cheap funding. That could mean the government pays more than current market prices for the securities, CNBC explained.
However, if the government ends up paying less than the value at which the assets are carried on banks' books, the banks would issue common equity to the government, CNBC reported.
The Treasury's Troubled Asset Relief Program has already invested more than $150 billion in banks, but that was done through preferred shares being sold to the government. There's now a growing feeling that preferred equity isn't enough to make the banks healthy, CNBC said.
Citigroup (C: 3.55, +0.22, +6.6%) shares climbed 9.3% to $3.88 in late trading, while Bank of America jumped 11% to $7.19.
J.P. Morgan Chase (JPM: 24.96, +0.46, +1.9%) and Wells Fargo (WFC: 16.19, +0.71, +4.6%) advanced more than 3%.
The Financial Select Sector SPDR (XLF: 9.14, +0.31, +3.5%) , which tracks all the financial stocks in the S&P 500, rose 4.2% in late action.
Greg Morcroft is MarketWatch's financial editor in New York.