UAB Expert Commentary: Newly Announced Financial Bailout Could Restart Consumer Credit Flow

Tuesday, Feb. 10, the U.S. Department of the Treasury announced the details of its latest financial bailout measure, the Financial Stability and Recovery Plan.

February 10, 2009

BIRMINGHAM, Ala. - Tuesday, Feb. 10, the U.S. Department of the Treasury announced the details of its latest financial bailout measure, the Financial Stability and Recovery Plan.

The program includes a number of divergent strategies all aimed at stabilizing the U.S. financial sector, including another round of cash infusions for troubled banks and new mechanisms to help troubled homeowners refinance mortgages. Another pillar of the plan is government-supported private investor purchases of non-performing bank assets, or loans and mortgages that are more than 90 days delinquent. This component is most crucial to the plan's overall success, according to UAB Assistant Professor of Finance Andreas Rauterkus, Ph.D.

"The purchase of bad assets was originally considered last October as part of the original federal government financial bailout TARP program," Rauterkus said. "Ultimately the government chose to simply infuse troubled banks with cash last fall, and the goal of unfreezing the credit markets was never reached."

Rauterkus said the government's decision to now move forward with the purchase of non-performing or "toxic" bank loans and mortgages could be the key to unlocking credit and restoring investor confidence in the banking industry. He said the non-performing loans have led to trillions of dollars in write-offs for banks, forcing them to hoard cash to offset the losses.

"If you can remove any question marks from bank balance sheets, investors will return, and those investments will help recapitalize the banks, giving them more cash to distribute to businesses and consumers in the forms of new loans and mortgages," Rauterkus said.

"Another reason why I like this particular part of the new plan is because it removes lingering doubt," Rauterkus said. "Buying up these non-performing assets could potentially create a big one-time loss for banks, but that is better than prolonged fears of more and more losses piling up over time.

"So this measure cuts to the heart of the banks' problems and creates a much quicker rehabilitation time for many of them," Rauterkus said.