I have been fielding a lot of questions about my opinion of the new (old?) Geithner (Paulson?) plan to remove toxic assets from bank through an auction and public-private partnerships. The big question is "Will it work?" It’s uncertain, and it can be evaluated on 2 main criteria, the impact on the banking sector and the cost to taxpayers.
First, will the process generate a high enough price for so-called toxic loans to repair banks balance sheets and get them healthy and lending again. We will find out in a few months when the auctions take place. The reaction of the market reflects optimism that it will, but that’s not a sure thing.
Assuming the plan makes it over the first hurdle of acquiring the assets and helping the banks, the next question is how do taxpayers fair? It will take longer to answer that question, because it depends on how these mortgages perform over the long-term. If they perform better than expected, taxpayers and private investors in these partnerships could profit. If they perform poorly, the program amounts to yet another bailout by taxpayers who overpaid for the loans.
As I have said to others (including this reporter from the local small town newspaper, who surprisingly got the basic idea of my rambling correct), I'm not sure that this plan means nationalization of some of the sicker banks is totally off the table. In fact, it could actually clear the way, if these auctions are still unable to generate the asset values needed for some of the weaker banks. I just came across this post from Noriel Roubini (aka Dr. Doom) who makes this point with more clarity and expertise than I.