The Ultimate Bad Bank Plan

After several wrenching weeks, it's looking like Timmy The Invisible Boy, Helicopter Ben, and Team Treasury have come up with the plan to save the banks through wishful thinking.

Officials said President Obama has largely signed off on the plan in discussions with Treasury Secretary Tim Geithner and the president's economic team. A meeting was scheduled today at the White House to discuss the plan. But some details of the so-called Public Private Investment Fund, or PPIF, had yet to be worked out and officials cautioned that could delay the announcement to the following week.

Still, officials say the broad outlines of the plan have been decided. Several competing funds will be established with capital from both public and private sources. The hope is to have these funds bid on the assets weighing down the balance sheets of the nation's banks and create a market price through the competition.

The administration plans to begin the program, to be overseen by the Treasury, the Federal Deposit Insurance Corporation and the Federal Reserve, with purchases of up to $500 billion in assets. It could be expanded to $1 trillion.

The bidders will be offered low-cost government financing to buy the assets and some form of insurance to protect them against downside risk. Taxpayers, in turn, will also have a way of profiting on the upside if the assets appreciate.

So, if I'm reading this right:

1. The government will create funds to compete to purchase toxic crap, leaving good bank assets behind.
   
2. The government expects private investors to put money into these funds to see which one can buy the most toxic shit for the best price.
   
3. The reason private money would ever show up in these funds is that the taxpayer will pick up the inevitable losses.
4. Ergo, the government is setting prices for these assets through the funds, effectively giving the banks free money for crap assets.
5. The taxpayer then is stuck hoping these assets go up in value at some point, which is wishful thinking.

Banks get free money and get bailed out. We get toxic crap that will continue to fall in value because nobody will in turn purchase these assets from the government funds. They know they are worthless. If they were worth something, companies would be buying them without the government having to do it.

Once again I fail to see how this is anything other than giving $500 billion to $1 trillion more in free money to banks and sticking taxpayers with the bill. If the funds pay too high a price, the taxpayer will never get their money back. If the funds pay too low a price, the banks go under and private investors will never put in any money.

This still comes down to the problem being "what's the correct valuation of toxic assets" when the question should be "How do we break apart these insolvent zombie banks safely?"

Timmy and Ben are wasting our time with this plan, not to mention another trillion bucks. If this is what Obama is relying on, then yeah, we're done for.