[UPDATE: Krugman: "The zombie ideas have won"; Yves: "A lot of bells and whistles to finesse the fact that the government will wind up paying well above market for crappy paper"; CR: "A direct subsidy from the taxpayers to the banks"; Dean Baker: "Treasury officials who missed $8 trillion housing bubble still haven't noticed It"; Galbraith: We need "INDEPENDENT EXAMINATION OF THE LOAN TAPES "*. So where's my fucking bailout? --lambert

Oh, and I just (7:22PM EST) checked The Obana 527 Formerly Known as Daily Kos, and there's exactly one mention of the Geithner plan: a link to Krugman's column in "Pundit Roundup." Does the 8:45AM conference call not take place on the weekends? Or are they waiting for Obama to tell them what to say on 60 Minutes? Might as well read the sports section...]

Gee, it's been so long, I'd almost forgotten. Somebody smarter than me about finance will have to figure all this out, but my $0.02 -- or $2.00, or $0.00002, depending on how things play out on the [in|de]flation front -- is that something this complicated is either yet another round of three card monte or a massive fail** in the making:

Treasury Plans to Offer Loans to Buy Bad Assets

My head hurts already.

The plan is likely to offer generous taxpayer subsidies....

Of course, of course.

.... in the form of low-interest loans, to coax [!] investors to form partnerships with the government to buy toxic assets from banks.

The hope is that such a generous [twice now, with the "generous" word] taxpayer subsidy will attract private investors into the market and accelerate [Now there's an assumption] the recovery of the country’s banks.

Yes, well, "hope." This seems to be the theory:

Risk-taking [just not this risk] institutional investors, like hedge funds and private equity funds, have refused to pay more than about 30 cents on the dollar for many bundles of mortgages, even if most of the borrowers are still current. But banks holding those mortgages, not wanting to book huge losses on their holdings, have often refused to sell for less than 60 cents on the dollar.

The result has been a paralyzing impasse. Banks, unwilling to sell their loans at fire-sale prices, have had less capital available to make new loans. Mortgage investors, unable to leverage their investments with borrowed money, have been unwilling to pay more than fire-sale prices.

To break that impasse, the government’s crucial subsidy is meant to provide investors with the kind of low-cost financing that has been utterly unavailable in today’s credit markets.

So, if I have this right, and I'm not sure I do, we, the taxpayers, are making up the difference between what the banks are willing to sell for, and the hedge fundies are willing to pay. (I thought the market was supposed to perform that adjustment? The invisible hand, and all that? Did I not get the memo?)

And here's how it will work:

To start the program, Treasury will ask banks, like Citigroup or JPMorgan Chase, to identify pools of residential and commercial real estate loans that they will be willing to sell through an auction.

Somehow, I think they'll be "willing" to sell all of it. It's toxic, remember?

Private investors will bid against each other, setting a market price. No bank will be required to participate.

Why won't they collude to drive the price down? With the taxpayers making up the difference?

And it's not really a market price, is it? Isn't it more a Potemkin market, which exists only by virtue of a massive taxpayer subsidy?

Looks to me like the real problem is that the banks and the hedge fundies together are holding the country hostage. Neither of them are feeling any pain, and the Obama administration isn't willing to inflict any, so the impasse will continue until the country can't stand it.

In other words, Big Money (banksters + shadow banksters) is indulging in strategic behavior. See especially this question (09/28/2008):

If somebody was going to give you a trillion dollars if you caused somebody else a little pain, what would you do?

Because, if the Times is right, that's exactly what's happening, isn't it?

No wonder the country's buying seeds and guns.

NOTE * On the loan tapes, see here.

NOTE ** I mean "fail" from a public policy perspective. From the perspective of those to whom our wealth is transferred, the entire process has clearly been a massive success.

UPDATE See also AP, which smooths such rough edges as there are in the Times coverage, above:

The plan will use the Federal Reserve and the Federal Deposit Insurance Corp. to make the resources of the government's $700 billion financial rescue fund go further, the officials said Friday.

Oh, great. Is my deposit insurance any good, now that Timmy's going to loan it to hedge funds to buy toxic assets with?

And naturally, we have to keep paying the banksters fat salaries, or they won't play:

Hedge funds and other big investors may be even more leery of accepting the government's enticements to purchase these assets for fear of the imposition of tighter government restraints in such areas as executive compensation in the wake of the uproar over AIG.

Again, what kind of market is it where people won't participate in it unless their salaries are high enough? I'm not even sure it is a market. Rather, it's just a fancy way of dividing the spoils among ruling factions of the oligarchy.

Hey, how about Obama on Jay Leno? Best guest EVAH, or only superb?

UPDATE To those who ask for some sort of "responsible" policy recommendation from me, I don't have one (other than turning the banks into regulated public utilities). But I don't think any of us can make any such recommendation; when two trillion dollars disappears into a black hole with no visible result, the order of the day is to restore transparency and accountability. Only then can a policy process proceed.

UPDATE I keep asking "What kind of a market is this?" and maybe the answer is a market for lemons:

Akerlof's paper uses the market for used cars as an example of the problem of quality uncertainty. There are good used cars and defective used cars ("lemons"), but because of asymmetric information about the car (the seller knows much more about the problems of the car than the buyer), the buyer of a car does not know beforehand whether it is a good car or a lemon. So the buyer's best guess for a given car is that the car is of average quality; accordingly, he/she will be willing to pay for it only the price of a car of known average quality. This means that the owner of a good used car will be unable to get a high enough price to make selling that car worthwhile. Therefore, owners of good cars will not place their cars on the used car market. This is sometimes summarized as "the bad drive out the good" in the market. "Lemon market" effects have also been noted in other markets, such as used computers and the online dating "market".

So, I guess the toxic assets are the used cars. The asymmetry is that only the banksters know or can guess the extent of their fraud. And the hedge fundies know the the baniksters won't sell them assets that aren't toxic, so that drives down the average price? Note, again, that transparency and accountability are the answers to the problem, because that eliminates the information asymmetry. Then, you have a real market, not a lemon market. But now Timmy steps in, and rather than resolving the asymmetry, subsidizes the lemon buyers. Buyer and seller then, no doubt. split the take.

UPDATE Hilarity at BooMan's:

Obama Administration Needs to Wake Up
The immediate problem is that the Obama administration is allowing this debate to go on on these terms (with incomplete information) a full two-days before they are prepared to roll out their plan and their justifications for the plan. As far as I can tell, there was a leak to the New York Times but no outreach to the blogosphere (or Krugman) to tell their side of the story. That leaves them open to blistering and predictable attack from the Left at the very moment the Congress is seized with populist furor and the Republicans are looking for every opening to attack.

Regardless of the merits of the plan, this is not a good situation. My advice to the White House is to spend Saturday night and all day Sunday reaching out to their critics and explaining their side of the story. As Sonny Corleone said in The Godfather, come Monday, "...I want somebody good - and I mean very good - to plant that gun. I don't want my brother coming out of that toilet with just his dick in his hands, alright?"

Could it be that not presenting warmed over Paulson-ism as change you can believe in would have helped with the "outreach" problem?

Love the Godfather reference, though. So a propos, given that banksters are gangsters.