toxic asset plan in layman terms

Layman terms only: My understanding is that government is trying to buy and recruit private investors to buy some of these MBSs which are based on problematic securities. As a private investor if you think you are getting an asset that was worth $1 for x cents and you think that it would go up to at least y cents, that that’s a good bargain. The challenge is to figure out what x and y are. They are trying to relieve the banks of these toxic assets. So the bank sells an asset for x cent and takes a hit of (1-x) cents. The only reason they are not making the bank just readjust the balance sheet and reduce it by (1-x) cents is that by buying from the bank you are giving the bank cash which it can then give to consumer. Am I completely off here?

bond, james bond off, …

needhelp: you missed one point: most banks have already aggressively wrote down their assets based on mark-to-marking accounting (FAS 157) rules… in such case, for example, if they wrote their assets down to reflect a $0.40 value on a $1 par value, and if they can sell their assets at $0.50, then essentially, they can mark up their books by $0.10, which can significantly boost their value.

You’re a little off. Say I’m a private investor who buys this stuff. I either A) have investors or B) I’m rich, but I still have opportunity costs. As such, comparable investments like Preffered Stock and Corporate Bonds all offer current yield, so I need to get current yield on my investments. Suppose you’re talking about a $100 Mortgage that pays 5% interest annually. If you need to get a 10% current yield for your investors, you can pay $50 (5%*100/10%). Now suppose you can borrow at 6.5%. If you borrow $50 at 6.5%, then you incur $3.25 in interest expense leaving you with $1.75 in income to pay dividends with. So based on this capital structure, you can support $17.50 in equity, making it possible to buy the loan for $67.50 instead of $50. That’s a 35% increase in the value of the bank’s position. In the real world it’s more complicated but that’s the gist of it.