Economic Outlook: A toxic hangover

Washington regulators have turned their attention back to a cornerstone of the financial crisis with a scaled down version of a program to buy toxic assets.

There are, specifically, three approaches to unwinding the U.S. housing crisis in the works. The first is to have the Federal Reserve Bank purchase mortgage-backed securities from the nation's central mortgage brokers, Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association, creating a demand that has helped lower interest rates. The second tack is to help homeowners negotiate better deals with lenders by modifying loans -- a tactic that has produced disappointing results.

Tack No. 3 is now in the works: an effort to create a market for soured loans that are gathering dust on banks' books and clogging up the flow of credit.

Troubled, toxic, frozen or soured assets: These are the most common adjectives used to describe loans that have lost their value because the homes are now worth less than the loans themselves. The homes, in the vernacular of the trade, are sitting underwater.

To turn soured assets into a financial market, the government is relying on a public-private partnership that dodges the problem of having the Treasury Department price the bundled assets incorrectly. Bringing the private sector into the mix allows the marketplace to set the price. And there's nothing like a public auction for finding a viable price for something, including a toxic asset.

The Treasury named nine firms to serve as money managers and gave them 12 weeks to raise $500 million each -- in addition to $20 million of their own money.

The Treasury will also contribute $30 billion, less than a third of the $100 billion it proposed to contribute four months ago, The Washington Post reported Thursday.

What concerns bankers at this point is whether or not the auction will push prices high enough to sell assets that may simply become marketable over time, when the economy recovers.

The market's uncertainties and the perception the government is shifting policies capriciously has scared off one of the original designers of the program. The bond fund Pimco said it would not participate "as a result of uncertainties regarding the design and implementation of the program," the Post said.

In Asia, markets were mixed Thursday. The Nikkei 225 in Tokyo fell 1.38 percent. The Hang Seng index in Hong Kong rose 0.39 percent. The Singapore Straits Times rose 2.12 percent, while the S&P/ASX in Australia fell 0.12 percent.

In midday trading in Europe, the FTSE 100 in London rose 0.60 percent, while the DAX 30 in Frankfurt rose 1.18 percent. The CAC 40 in Paris rose 0.81, while the broader DJStoxx 600 rose 0.96 percent.