U.S. Incentive Will Eliminate Up to $1 Trillion in Bad Loans

Barack Obama to cooperate with private investors in order to solve the financial crisis. Up to $1 trillion in bad loans will be taken from U.S. banks.

American banks, which recently were more than willing to hand out loans, are now struggling with borrowers who cannot afford to pay the loans back. These bad loans clog the system, people are fleeing their houses and the banks are not lending out more money. This is what President Barack Obama and Treasury Secretary Timothy Geithner are focusing on to pull the U.S. out of the financial crisis. The U.S. Treasury is offering financial support to private investors who will buy the banks’ bad loans.

Intervening

It will be interesting to see whether investors will buy into this. What will happen to the real estate market? This initiative is directly aimed at helping those who bought expensive properties and cannot manage their loans, said Arne Jon Isachsen at the Norwegian School of Management’s department of social economy.

According to the plan, which was presented yesterday at the White House, the state intends to spend between $75 and $100 billion from the stimulus package Congress approved last year on subsidizing private investors who buy bad loans. In that way, the banks will be relieved from unpaid loans mounting to between $500 billion and $1 trillion.

Avoiding heavy losses

The government hopes that this plan will allow people to stay in their houses. However, the question is how much the banks will sell the bad loans for, Isachsen said.

“If you live in a house in the U.S. you bought for $600,000, entirely financed by loans, witch is worth only $400,000 today, of course it is tempting to give back the house to your bank; however, by doing so you exacerbate the housing crisis even further,” he said. “Accordingly, Obama’s plan is to entice private investors to buy the loans from the banks, to decrease your interest rate so that you can keep your house, and to make the banks avoid heavy losses. The private investors are receiving state subsidies.”

Skeptical investors

The hope is that banks will be more willing to provide loans to companies and private individuals. Yesterday, after details about the plan were revealed, the stock market went up in Europe and Asia. However, the plan was not well received by American private investors. Obama recently expressed outrage towards the AIG executives who collected millions of dollars in bonuses while the company received government subsidies to avoid bankruptcy.

“To moralize is something I resent, but I believe Obama does the right thing by making this a question of value,” Isachsen said. “It is not surprising that the private investors are acting hesitant; they are only trying to make the most money out of this. Naturally, they will claim this is a bad deal in order to make a better bargain.”