Geithner Plan Is Flawed

The stock market roared its approval for the latest plan to help ailing banks from Treasury secretary Tim Geithner. The sharp rally is reminiscent to me of previous hopeful rallies after the US government announced plans to fix ailing Wall Street banks.

This plan attempts to draw in private players which would partner with the US government is buying up toxic assets. Briefly, the plan involves the use of leverage and government loan guarantees to entice private participation. So any private participants would face little risk. The risk would fall mainly on the government and US taxpayers.

The key sticking point, as I see it, is whether the banks will accept the offers made by these public-private partnerships. Let's say a block of toxic assets is valued by the banks at 60 cents on the dollar, but the private-public partnerships are only willing to offer 40 cents for those toxic assets.

What will happen? I would expect that since Wall Street bankers are still living on Fantasy Island that they will refuse to sell the assets at the lower price and take the loss. The toxic assets will remain on the books of the Wall Street banks for many, many years and the problems in the credit markets will remain like a festering wound.

When this happens, the US government will finally be forced to nationalize the Wall Street banks on a temporary basis. Uncle Sam then will sell these toxic for whatever price they can.