There are plenty of questions about the latest efforts by the U.S. Treasury to save the financial system with a buyout of banks’ illiquid assets, and analysts warn that it won’t, by itself, put an end to the credit crisis.

The U.S. Treasury is planning a new agency to buy hundreds of billions of dollars worth of illiquid mortgage securities from banks, hopefully allowing them to get back to the business of lending. BMO Capital Markets points out that this is not the same as the Resolution Trust Corp. (RTC) that was established during the savings and loan crisis. “The RTC held the assets of failed institutions, selling them off by 1995.”

While the markets rallied heavily on the news, BMO points out that, “There are so many questions yet to be answered about the emergency plan; for example, will the new agency purchase bad assets from hedge funds, mutual funds, pension funds and other managed investment pools? How about from the financial subsidiaries of nonfinancial companies such as GE, whose stock price had fallen sharply? What about the U.S. subsidiaries of foreign financial institutions; will their bad assets be purchased as well? Will off-balance sheet assets such as SIVs be addressed?” CIBC World Markets also says that the details, to be unveiled in legislation next week, will be critical. “From whom will the Treasury buy, in what volumes and, most importantly, at what price? Clearly, buying at mark-to-market valuations would accomplish nothing.”

Global Insight also has plenty of questions about how this new agency would work, “especially the tricky task of assigning valuations to the assets that they intend to buy.”

“The private U.S. financial system still will have to bear a share of the losses on these assets in the months ahead, but the success of the plan is to establish an end-game for this long drawn-out crisis so that the banks can take a final set of lumps and move on,” it says.

However, the firm cautions, “But the plan is not a magic wand, as this final round of write-offs to be borne by the financial system will exact further short-term deflationary pressure on an economy that is still battling recessionary forces.”

“If the new strategic initiative accomplishes the broad goals of allowing the financial sector to take a final set of lumps and move on from the crisis, thereby restoring more normal credit conditions, while at the same time minimizing the long-term costs to the taxpayer, then it will be deemed a success. That being said, significant short-term upward pressure on the deficit is an inevitable result of moving forward on this type of strategic gambit,” it concludes.

BMO also sees the plan as the first steps to easing the credit crisis. Still, at least three things need to happen to bring the crisis to an end, it says: Financial institutions and others have to confess their mistakes by selling distressed assets (to the government), much of which was bought with borrowed money; they need to reduce leverage; and they need to rebuild their capital cushions.

IE