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The Treasury Department will pour money into private investment funds that bid against each other to buy troubled assets from banks, officials said today, describing a long-awaited but risky signature piece of the government's strategy for stabilizing the financial system.
Under the plan, the government and private investors will invest together to buy up between $500 billion and $1 trillion worth of real estate-related loans and securities from banks. The hope is that instead of hoarding cash in case those assets continue to lose value, the banks instead will be able to resume lending money once the toxic assets are off their books.
The government and private investors, meanwhile, will hold the assets for the long term, and stand to either make or lose money depending on how the economy does.
Treasury officials are betting that the current low market prices for these assets are driven more by excessive fear than the reality of how the economy will perform, and that the new purchases will help kick-start those markets and return them to more normal functioning.