RIP Geithner Plan

Since I explained last week how the banks didn't need the Geithner Plan in order to keep up the illusion of solvency, it appears this week that the Geithner Plan is now quietly being shelved.

The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.

In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.

In a statement, the F.D.I.C. acknowledged that it had not been able to get banks interested in its so-called Legacy Loans Program. Scheduled to start later this month, the pilot program was aimed at selling off $1 billion in troubled home mortgages.

F.D.I.C. officials portrayed the change as a sign that banks were returning to health on their own.

That's funny, because the FDIC clearly went to all this trouble to make the banks look solvent. The issue was that the real measures the Fed and FDIC took to prop up the banks (AIG counterparty loans) worked too well. Now the banks want nothing to do with the government anymore other than to keep feeding them money under the table while they pretend the recession is over.

We're suddenly supposed to believe that the banks are so magically solvent now they went from needing a trillion dollars more in loans to not needing a dime?

And to boot, those toxic assets are still on the books of the banks. We were told this program was critical to the economy, a trillion dollars worth of critical. Now, it's no longer needed. The banks are suddenly fine!

And they'll continue to be fine right before the next wave of the recession crashes down upon their heads and ours, too.

Do you believe our banks are solvent?

You're already betting your livelihood on it.

I called this back in February. I said that the no right price problem would kill any program like this. I was correct in saying the Fed, Treasury, and the FDIC were wasting America's time and money with it.

Surprise, surprise. And now we're back to pretending everything's fine again.

[UPDATE] Much more on this from Baseline, Naked Cap, Calc Risk, and Ezra Klein.