But what about the banks?  It is indeed a travesty that the taxpayer is funding most of the “deal” and is giving up most of the upside to the bond daddy’s, like PIMCO and Blackrock.  However, the greed of said bond daddy’s will make it hard for them to turn this deal down.  Setting conscience aside, I can’t blame them. It’s a bird’s nest on the ground!

But, will the banks sell?  If they don’t, then the plan is a failure. If they do, it’s true, the taxpayer suffers ($2 trillion, maybe more?), but the banks will indeed unload those “toxics”.  And, if those toxics are off the banks’ books, does that make the banks able to lead us into economic recovery?  Well…there’s still CMBS’s and Credit card loans left to go really bad and be dealt with.  Will those be more upside opportunity for the bond daddy’s?  Well, it could be that if the Treasury pulls off this first heist, or gift to the bond daddy’s, they will be able to pull off the second and third for CMBS’s and credit cards, respectively, too.  So… in summary, it all depends on whether the banks will accept the bond daddy’s offers.  If they do-looks like we should be buying bank stocks…and bond daddy’s too.   The market today clearly thinks the banks WILL accept their offers.  The WSJ reports the big banks are likely to take the offers:

“By Matthias Rieker

Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)–Strong banks will benefit from the Treasury’s new plan to buy to $1 trillion in troubled loans and securities; for weak banks, the plan may require them to face write-downs they can ill afford.

Thomas B. Michaud, a vice chairman of KBW Inc., agreed. “The market went from too much leverage to no leverage,” and that led “to a massive problem in price discovery” for assets banks would like to sell, he said. Private investors had to rely on the loans or securities alone to generate their returns, but with the benefit of the government’s leverage, investors are able to pay higher prices.

The Treasury intends to establish an auction process for assets banks want to sell.

“Those [banks] with enough capital” will benefit, Michaud said. “Those who can afford to rid themselves of the bad assets at the prices offered. If you are a very thinly capitalized institution you may feel as if you cannot afford to sell assets at the required prices.”

However, in concert with the other government programs already put in place, the banking system might be on its way to stability, Michaud said. Though he said many will need to raise more capital to make it through the crisis.”

From Silla Brush at The Hill:

“We like it,” said Scott Talbott, a lobbyist at the Financial Services Roundtable, which represents 100 of the nation’s top financial corporations. “Our banks say, ‘We’ll be selling,’ and our private equity clients say they’ll buy.”

Of course the prices haven’t been established yet so it’s unclear how the lobbyist’s banks can know they will sell…or do they really already know and the fix is in? Are there those who think otherwise?  On Sunday, Mark Williams of the  Associated Press reported:

“It’s quite possible we could make bad banks out of good banks,” Sung Won Sohn, professor of economic and finance at the Smith School at California State University, said Sunday.

Sohn wonders whether the sale of assets at bargain prices, to remove them from banks’ balance sheets, would then force other banks to have to write down the value of similar assets they might not want to sell…”

IF one bank IS forced to write down their assets due another bank accepting the offer from the bond daddy’s…this could bring a panic as all banks scramble to find capital to offset the losses and scramble to find other bond daddy’s to buy their toxic assets too.  The Treasury program might then have to morph into a much larger plan…even before the CMBS’s and credit cards go really bad.

Felix Salmon says the plan could make things worse due to the same things we point out above: setting a market that other banks can’t live with:

“The status quo, absent any Treasury proposal, is basically the Hempton plan: let profitable-but-insolvent banks work their way slowly back to solvency by making large operating profits and not paying dividends. But the problem with the Hempton plan is that it only works on a kind of don’t-ask-don’t-tell basis: the banks can’t be publicly insolvent, since then they need to be taken over by the government.

The minute the Treasury plan is put into action, we’ll have a lot of public price discovery for the banks’ bad assets. And if the prices don’t clear — if the minimum price the banks will accept is higher than the maximum price that the public-private partnerships are willing to pay — then no one will any longer be able to perpetuate the fiction that America’s banks are solvent. And without that fiction, the Hempton plan — the muddle-through status quo — is toast.

The big hope of the Treasury plan is that the private sector will be willing to pay a higher price for leveraged assets than it would for unleveraged assets.”

Following up on Felix Salmon’s last sentence, if investors pay 10% more than they think the underlying  assets are worth (without leverage) they increase the risk of complete wipeout of the scant equity they put up…If investors (the bond daddy’s) truly believe the value of the toxic assets will at least stay stable, if not rise, this may be a good bet. But if there is much risk they will fall, then they won’t buy them.  This is true even if the assets are held by the investors to maturity because if the value falls it is because the cash flow stream has fallen.

Liberal Arianna Huffington wants Geithner to resign and calls the Geithner plan a rehash of Paulson’s ideas:

But the issue isn’t Geithner’s delivery, it’s what he’s delivering: an approach to the crisis that is as toxic as the assets that have hamstrung the economy. Geithner, brilliant and hardworking though he is, is trapped within a Wall Street-centric view of the world and seems incapable of escaping.

That’s why every proposal he comes up with is déjà vu all over again — a remixed variation on the same tried-and-failed let-the-bankers-work-it-out approach championed by his predecessor, Hank Paulson. For Paul Krugman, this “insistence on offering the same plan over and over again, with only cosmetic changes, is itself deeply disturbing. Does Treasury not realize that all these proposals amount to the same thing? Or does it realize that, but hope that the rest of us won’t notice?  That is, are they stupid, or do they think we’re stupid?”

Well, if you are confused about who exactly IS stupid here and about whether the banks will accept the offer and whether we should buy banks – We are too.  How can the market be so sure?

The Treasury has released its new plan to remove toxic assets from banks.  It provides an example of how the plan would work for legacy assets.  Perhaps as we read it, we should mentally substitute a lower price than the 84 used in the example.  Then estimate best and worst cases for the resale value of the example asset (say) 4 or 5 years from now.  Here is the example:

Sample Investment Under the Legacy Loans Program

Step 1: If a bank has a pool of residential mortgages with $100 face value that it is seeking to divest, the bank would approach the FDIC.
Step 2: The FDIC would determine, according to the above process, that they would be willing to leverage the pool at a 6-to-1 debt-to-equity ratio.
Step 3: The pool would then be auctioned by the FDIC, with several private sector bidders submitting bids. The highest bid from the private sector – in this example, $84 – would be the winner and would form a Public-Private Investment Fund to purchase the pool of mortgages.
Step 4: Of this $84 purchase price, the FDIC would provide guarantees for $72 of financing, leaving $12 of equity.
Step 5: The Treasury would then provide 50% of the equity funding required on a side-by-side basis with the investor. In this example, Treasury would invest approximately $6, with the private investor contributing $6.
Step 6: The private investor would then manage the servicing of the asset pool and the timing of its disposition on an ongoing basis – using asset managers approved and subject to oversight by the FDIC.