A Missing Puzzle Piece

The US market rocked hard yesterday, Dow racked up almost 6.8% gain. It has also helped crossing 7,500 convincingly. Dow closed at 7,775. The booster was Tim Geithner unveiled how they plan to handle toxic asset which I have been harping and hoping they will address it ASAP. Thank you for answering that concern - now you are doing not just talking.

You can read his plan at : http://www.financialstability.gov/

I am quite please overall. The most important part of it, they have decided on the philosophy - they must get rid of the toxic asset so that banks can raise private money and start lending again. They estimated about $ 2 trillion toxic asset and they put up a plan to handle the first $ 1 trillion.

The second part was talking about how to finance/structure the deal on legacy loan and legacy securities.

On legacy loan, they structure in a way debt:equity not more than 6:1. The example given was how to get rid of toxic asset with $ 100 face value on/(off??) bank balance sheet. They will go through some kind of auction. For example, the highest bidder got it at $ 84, FDIC will provide a loan of $ 72 and leave equity of $ 12. Of 12 equity, Treasury will come out with $ 6 and private investors $ 6.

Legacy securities is structure differently, it's a 50:50 between Treasury and private investors. The leverage can go higher for private investor depending on a situation.

It's a smarter way to leverage without printing too much money. The real key to this is assuming toxic asset is really beaten down below Fair Value ( Warren Buffett in a CNBC interview earlier said probably is and I hope it is). The tricky part if how do you value illiquid toxic asset? Mark-to-market is hard as it is illiquid and rarely traded - so not sure how to mark to NO-Market really. Net Realizable Value? Boys, just agreeing on valuation part of it will take a lot of time. This is the last piece of missing puzzle. If Obama administration can solve this last piece -- we all can pop our champagne.