The Geithner plan, the good and the bad.

Tim Geithner today was on Meet the Press selling to the public his plan to shore up the toxic assets and alleviate the bank’s balance sheets. Right now the banks are crippled because they aer holding assets whose value nobody truly knows, some rough estimates suggest that the value of these mortgage based securities could be 50-70% lower than their original purchase price. At this point banks do not want to let go of these assets because they are partially hoping that prices will rebound and in part because they are waiting for government intervention. The latter is my speculative guess and their prudence certainly paid off given the Geithner plan.

Tim’s plan involves bringing in private moneys to offer them incentives to purchase these mortgage based securities. In other words, Tim thinks that private investors are going to use their own money to buy up assets whose true worth is impossible to evaluate at the moment. You are probably thinking, why would any private investor put money on the line for such a dubious “investment”. This of course is a great question, because it is entirely impractical to force essentially worthless assets down the throat of anyone, let alone private moneys. So the government will subsidize these purchases! That’s right, for every private dollar there will be a matched public dollar and this will incentivize private funds to pour into this system and shore up the toxic assets. If this works, private investors will walk away with a handsome profit while having half of their risk subsidized. Unfortunately Mr. Geithner was purposely deceitful and vague on Meet the Press, after all he is trying to sell this proposal and being truthful would have significantly impeded his effort.

He alleges that if this fails, private investors will lose all their money. True. However their risk is half of what it should be, because the other half is being put forth on the taxpayers. So while some of these private investors can CHOOSE to invest in this scheme, taxpayers like you and I are forced to put up our future as collateral. So once again, if this system fails then 50% of the private moneys will be gone and the rest will be paid for by our tax dollars. So what happens if this plan succeeds?

If this plan succeeds, then the private investors walk away with a ton of profit given that they only put up half of the required moneys. Taxpayers will get nothing, although I suppose some will claim that we will all benefit if the banks can finally start lending again. Of course that is all hogwash, because banks are lending right now – they are just lending with stringent requirements and not to deadbeats who can’t pay the money bank, just like they should have been doing in the first place.

So ultimately, there is one last question to answer. Perhaps you are interested in investing and think that putting down some money with a 50% government match sounds like a good risk. Where do you go? Answer, nowhere. This plan is not for the public and therefore not for you – these private funds will be chosen at the Treasury’s discretion and I assume it will be big investors on Wall St. Therefore if this plan works the big money/government wins and small money remains neural and if this plan fails, big money loses and small money loses.

What a clever plan Mr. Geithner. Looking out for the small guy eh?