Las Vegas vs. Philadelphia

The bulk of these assets are fashioned by bundling mortgages together and creating bond-like securities that give investors shares in homeowners' monthly mortgage payments. "A lot of them are mortgage [backed securities], but there are probably automobile loans out there, credit card debt, all sorts of things like that," says Blume.

But the broad term "mortgage-backed securities" doesn't give an indication of their great variety. A security based on mortgages from Las Vegas—some are packaged on a regional basis, though most are a broad mix—has caused many more homeowners to fall behind in payments there. When homeowners default, securities based on their expected payments lose value.

In addition to geographical variations, some toxic assets contain loans to borrowers with poor credit, while others do not. Some of these securities put their investors first in line to receive homeowners' payments, while others don't pay off until the higher-ranked investors have been paid.

Because these variations make the assets so hard to price, no one knows how hazardous they are to the banks that own them, especially as a bank may own a wide assortment of such assets. In this climate, banks are wary of lending to one another for fear they might not be paid back. That has choked lending to businesses and individuals. The freeze-up also has made it extremely difficult for banks to bundle new loans into securities. They need to create these securities and sell them to investors to raise cash for new loans.

Last fall the U.S. Treasury and Federal Reserve proposed dealing with these problems by purchasing the toxic assets with government funds, in hopes of reselling them to investors later. But as soon as the $700 billion Troubled Assets Relief Program (TARP) was approved, the agencies dropped the plan and started pumping the money directly into the banks, arguing the crisis had become so severe it needed quicker action.

With the crisis dragging on, the Obama administration returned to the idea of buying up troubled assets. The first outlines of its plan were announced in February and were widely criticized as too vague. But the March 23 announcement of the Public-Private Investment Program provided details of three interconnected moves to buy up to $2 trillion in toxic assets.

Under one part of the plan, the Federal Deposit Insurance Corporation (FDIC) will oversee the auction of bank-owned bundles of mortgages to investors such as hedge funds, private equity funds and pensions. The government will lend investors up to 85% of the money they need for the purchases, and it will use taxpayer money to match investors' spending for the remaining 15%.

In the second element, the Treasury will lend money for a joint public-private purchase of mortgage-backed securities and pools of mortgages. Together, the first two programs could buy up to $1 trillion in assets. The third program will buy about $1 trillion in toxic assets through the Term Asset-Backed Securities Loan Facility (TALF).

To attract investors, all three programs will offer nonrecourse loans secured only by the underlying assets. This means an investor such as a hedge fund can lose only the money it puts up itself for the asset purchase. While borrowing at a six-to-one ratio will increase potential profits, potential losses will be limited because the investor will not be liable if the assets bought with borrowed money turn out to worth less than was paid. In that event, taxpayers would lose money when that portion of the loan is not paid back. Taxpayers could make money if the investments end up being worth more than was paid, and they will earn interest on the loans.