Henry Blodget may be disgraced as an internet stock analyst but his argument makes sense.  We raised a similar idea.  The basic idea is that when one bank receives and accepts an offer on a particular asset, the argument that “there is no market price” can no longer be used by that bank or others. Thus, banks all over will be forced to take additional write downs, making insolvency in many cases not just rumor but fact.  Bank reluctance to participate may be moot as they may be forced.

If the banks go through the exercise of putting assets up for sale only to have the bids come in at, say, 40 cents instead of the 60 cents on the books, the banks’ accountants and/or federal regulators might notice. So even if the banks recoil in horror and refuse to sell at 40 cents, someone somewhere might insist that assets now carried at 60 cents be written down to 40 cents (after all, they won’t have the “temporary illiquidity discount” excuse anymore, will they?). This will blow another huge hole in the banks’ balance sheets.

Given this, banks would probably be wise not to participate in Geithner’s plan. Which is why the government is already talking about forcing them to:

As the FT reports: “The unspoken fear here is that selling off loan portfolios would lead to more government capital injections into major banks,” said an executive at a large bank…
Richard Bove, an analyst at Rochdale Research, wrote in a note to clients: “[The plan] will not happen because it would destroy bank capital. It might cause a bank to fail the new stress tests under way. Banks will not take this risk.”

But while banks in theory have discretion over whether to sell loans, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said this decision would be made “in consultation with regulators” – a sign that the authorities might put pressure on banks to sell toxic assets.