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The markets are only beginning to learn the extent of the financial system’s rescue package that was hastily signed into law more than a week ago. The crux of the plan is the Treasury Department’s new power that allows it to buy the toxic debt now choking the flow of credit. But the law also gives the Treasury Department several other tools that greatly expands its reach into the financial markets. One of these provisions became clear on Thursday as discussion arose about whether the Treasury should inject fresh capital directly into troubled financial institutions in return for an ownership stake in the bank–essentially nationalizing private sector banks.

The point would be to bolster banks’ balance sheets that may remain weak even after they have divested themselves of the non-performing loans. It would complement the approach of buying the debt, says Sen. Charles Schumer, D-NY, a proponent of the idea, in a prepared statement. It “may prove to be the most promising tool of all in Secretary Paulson’s kit.”

Other new abilities the government has put into action right away: the purchase of commercial paper, which the Federal Reserve Bank began doing earlier this week after money market funds stepped back from this activity. The Federal Reserve Bank is also doubling its auctions of cash to banks to as much as $900 billion. Specifically, it will increase its 28-day and 84-day Term Auction Facility auctions to $150 billion each this month and next. The Fed will also begin paying interest on commercial banks’ reserves–another power granted to it under the Act.

What is still to be determined, though, is the heart of the bailout: how will the Treasury purchase the debt; how will it value it before it does; and how will it even identify what is bad debt in the first place? The market is about to find out–Treasury has solicited proposals and several asset management firms, reportedly BlackRock among them, have responded. Treasury plans to decide next week, according to news accounts. The agency did not return a call from GlobeSt.com in time for publication.

While few details are available, likely scenarios include reverse auctions in which firms put the assets up for bid, with the government selecting the lowest price. Until the final details are in place, though, there are any number of issues that could go wrong, Gary Eisenberg, an attorney with Herrick, Feinstein LLP, tells GlobeSt.com. Participation has to be voluntary, for instance, because an asset holder of an under-water security could claim it was not getting the true value of the asset in a ‘forced’ sale.

More than likely, however, companies will be lining up to participate. Indeed, there is a chance that with the government as a buyer now, the debt market will realign in unexpected ways. Debt–particularly mezzanine debt–is finally pricing to be a viable investment, Mesa West Capital’s Ryan Krauch tells GlobeSt.com. With the government participating now in the market as almost a captive audience–after all it has to buy these assets to accomplish its mission–it is difficult to say how long that value proposition will last.

Krauch, for his part, foresees opportunities as the capital markets continue to realign. “If you asked me if I would rather make investments in the last three years or the next three years, I would pick the next three years without any hesitation.”

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