It has been nearly six months.

Under the Bush administration in October of 2008, the Federal government approved $700 billion that gave the U.S. Treasury the leeway to buy toxic assets directly from financial companies. On the open market, these firms had trouble selling their complicated securities backed by a wide array of assets including mortgages. In boom times, such assets were a safe bet. As prices tumbled, however, banks had to suffer heavy write downs. The situation was so negative in those markets that banks could not even hope to sell the products even lower prices. Trust had vanished firms could not conduct business.

The government’s option to purchase the assets did not become a reality then, as the law which Congress and the President approved was intentionally flexible leaving open other possibilities. Instead of “Cash for Trash,” the government instead pumped billions of dollars of capital into the floundering companies, giving them stronger balance sheets. Nevertheless, in the next following months, stock indices were in a freefall, reaching levels not seen since the 1990s, as the additional cash did little to soothe investors.

Until recent weeks, stocks had continued to fall on concerns that the U.S. government would eventually have to take over major banks such as Bank of America and Citigroup. In Europe, government’s assumed majority control of several major banks. However when investors gained confidence that the U.S. government would not take majority control of the banks, determining to keep them in private hands, stocks began to stabilize, gaining in the most recent trading sessions.

Now, nearly half a year later, the Obama administration is addressing directly the troubled assets issue which was the concern nearly a half year earlier. With markets still frozen, a new plan will create a market subsidized and approved by the Federal government, allowing investors to take part in auctions to buy those untouchable assets.

Investors were apparently pleased with the plans today as the Dow Jones Industrial Average rose 7 percent.

Below is a diagram explaining the program. Further down are two sample scenarios as envisioned in the Treasury’s plan.

Toxic

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it seeking to divest, the bank would approach the FDIC.

Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.

Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.

Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.

Step 5: The Treasury would then provide 50% of the equity funding required on side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.

Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.

Sample Investment Under the Legacy Securities Program

Step 1: Treasury will launch the application process for managers interested in the Legacy Securities Program.

Step 2: A fund manager submits a proposal and is pre-qualified to raise private capital to participate in joint investment programs with Treasury.

Step 3: The Government agrees to provide a one-for-one match for every dollar of private capital that the fund manager raises and to provide fund-level leverage for the proposed Public-Private Investment Fund.

Step 4: The fund manager commences the sales process for the investment fund and able to raise $100 of private capital for the fund. Treasury provides $100 equity coinvestment on a side-by-side basis with private capital and will provide a $100 loan to the Public-Private Investment Fund. Treasury will also consider requests from the fund manager for an additional loan of up to $100 to the fund.

Step 5: As a result, the fund manager has $300 (or, in some cases, up to $400) in total capital and commences a purchase program for targeted securities.

Step 6: The fund manager has full discretion in investment decisions, although it will predominately follow a long-term buy-and-hold strategy. The Public-Private Investment Fund, if the fund manager so determines, would also be eligible to take advantage of the expanded TALF program for legacy securities when it is launched.