As everyone scrambles for a solution to America’s toxic debt problem, could exchange traded funds (ETFs) really be part of the solution?

Outside views from the ringleaders within the financial sector are being taken seriously by the Treasury lawmakers as trillions in government funding have been tapped out. Asset managers focusing on ETFs are now being included in this movement to broaden the scope of U.S. economic recovery plans, explains Index Universe.

The base of the issue is the toxic debt mortgage relief plan, which alone represents $1 trillion of regulators’ efforts to battle the recession and unfreeze lending. The Treasury’s plan to breathe new liquidity into this market is called the Public-Private Partnership Investment Program, or PPPIP. While the Treasury was developing the PPPIP program, which was unveiled in March, ETF companies began working on an alternative, according to Index Universe.

Two ETF plans have emerged as front-runners:

  • PowerShares Initiative: It began earlier this year when PowerShares filed papers with the Securities and Exchange Commission (SEC) to launch two new funds. These would be the first ETFs to target non-agency residential mortgage-backed securities (RMBSs). Although these funds only tackle the two top credit categories in RMBS-Prime and Alt-A, they still pose a great idea: What if you could package together the truly toxic debt into ETFs and trade them on the open market?
  • Stahl Plan: Advocated by both Murray Stahl, CEO of Horizon Asset Management, and Robert Holderith, CEO of Emerging Global Advisors, the plan also calls for the U.S. Treasury, with Congress’ approval, to make all interest income from primarily short-term MBS securities tax-free (based on specific provisions). If the banks agree to make it easier for mortgage holders, the government will make it easier for the banks, by boosting the value of their MBSs by making interest payments tax-free, with the government taking the losses on tax forebearance. Under the Stahl plan, the government would receive a portion of the expense ratio paid for managing the ETF to offset some of the lost revenue from making the interest income tax-free.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.