Bend Over, America

Here's what bothers me the most about the Geithner plan. Private investors only have to put in 7%, but get 50% of the profit. That's a ratio of more than 7 to 1. Should you buy the toxic crap at 20 cents on the dollar and the price improves to just 25 cents on the dollar, you just made 150% on the return. Sick, huh?

Bank A has $500 million in toxic crap. You buy it on the Geithner Plan for $100 million because the current value is 20 cents on the dollar, you pay $7 million. Toxic crap goes up to $125 million, you just made a cool $12.5 million on a $7 million investment, more than doubling your outlay. The potential to make a crapload of money if you buy at these bargain basement prices and wait until the housing market improves in the future is nice.

There's just two problems with this.

One, Bank A is going to lose $400 million on the above deal. They don't want to lose $400 million on said deal, so there is no way they will sell at 20 cents on the dollar. In fact, the banks are going to want to make a profit on these sales, so they are going to want to sell at above 100 cents on the dollar. The bank is in fact going to want you to pay $600 million for its $500 million of toxic crap that's worth $100 million, selling instead at 120 cents on the dollar.

In this scenario, the bank gets its $500 million. It's a happy bank, because it's getting $400 million in free money. The private investor put in $42 million (7% of $600 million) and is getting something actually worth $100 million, still a damn good deal. Should the price go up, it makes money. The only loser here is the taxpayer. The taxpayer is out $400 million plus.

If this is a trillion dollar program, and all the money is spent, the banks get $850 million dollars, the taxpayer loses a mint, and private investors still make a tidy profit.

Which brings us to problem number two: the deal's still not good enough for private investors.

Investors wondered how much of Geithner's plan would pass congressional muster, and questioned whether there would be widespread participation in the asset purchases. Officials at Pimco, the world's largest bond fund, said it would jump in, but Congress's recent erratic behavior, specifically toward strings it is attaching to companies that receive bailout aid, has some leery over the government as a trading partner.

"The program seems viable and I'm trying to connect the dots: Will this really help the banks normalize lending and therefore help the overall economy?" says Quincy Krosby, chief investment strategist at The Hartford. "I think the response will be positive--then you get into the next phase that is private investors working with the government."

"Given Congress's performance last week it's difficult to imagine investors will want to join the government unless there are written guarantees that the government can't change the playbook along the way," she adds.

Populist outrage over bonuses paid at troubled insurer and bailout recipient American International Group led lawmakers to discuss measures ranging from more stringent control over executive salaries to taxes approaching 100 percent on bonuses.

Such talk, as well as general apprehension over stringent controls of the financial system, sent jitters through the investment community that could reverberate should Washington start wobbling over the toxic asset program.

"It definitely is a step in the right direction, but it doesn't address the real fundamental question which is, has Wall Street become irrelevant?" Sowanick says. "Wall Street, which used to the provider of liquidity, can't do it alone anymore. The buy side has become so large that it dwarfs anything that Wall Street can do on its own, so you need an intermediary."

Wall Street knows the government needs them to cover this bailout. They know this deal smells like rotten fish. They fully expect Congress to find a way to kill this thing. Ergo, Timmy's going to have to make them an even better deal than this is now, as ridiculous as that sounds. They want guarantees up front. They will get them. Timmy doesn't have a choice now. Wall Street has Timmy and the taxpayers just where they want them and Geithner's response to us will be "Bend over!"

Enjoy. It's going to hurt. We're bailing out the banks again, only Timmy thinks we're too stupid to figure it out.