Brad DeLong, I think, would argue that the private sector's risk aversion is currently magnified beyond all reason

"The government is basically guessing at the price of these assets and laundering their guess through private investors who are in turn demanding a huge payoff to participate."

(my bolding)

Don't tell the truth, dude. They'll close off your access.

As one official said to me, "we're putting up six dollars for every one they offer. They'd be dumb not to participate."

Seems like it would easier and more accurate to simply let prices fall until the aversion subsides. They'll know when the price is right.

We can't have our cake and eat it too.

These complex ideas to help the markets restart lose sight of the basic premise that Ezra states:

The assets can be priced. Only the private market can price them.

Indeed. And that line alone should tell you all you need to know. And what goes part and parcel with that idea is that only the private market knows when the price is right...accounting for risk aversion as well.

All of this dealing is trying to do is induce the market to behave as if prices have dropped while they haven't....all in an effort to maintain overpriced prices.

And why? Because they officials don't want the prices to fall.

Chasing their tails, they are.

Futile.

Neither the banks that currently hold the assets nor the Treasury wants true market price discovery, because whatever the real mid-term truth of the value, it is so low that the banks would be bust (it certainly isn't 45-75% of face value).

There is no more assurance that the current market value is underpriced by risk aversion than that the real current market value will be overpriced in the auction because (a) they are in denial (b)values will probably continue to fall (c) the system might collapse if the value were known.

This is a shell game. If the 'investors' bid too low, the banks CAN'T sell and WON'T sell because it would destroy them. (In a real auction, the seller is setting a 'reserve' price higher than likely actual value.)

There is strong incentive to the investors however to overbid (above real value) because their potential losses are very limited and most of the loss will be born by the government - not this year, but pushed out into the future so it can be hidden from a currently angry Congress and public.

There is nothing honest about this, nothing transparent, and nothing that is progressive. It will choke off future government programs when the bill finally comes due and the current deficit explodes, and the Congress will know that this year and provide an excuse for not enacting the Obama budget at its current level for social investments.

Obama/Geithner have killed their own budget goose. All this to save banks they say are too big to fail but are (actually) too big to save because they are inherently threatening system failure.

Neither the banks that currently hold the assets nor the Treasury wants true market price discovery, because whatever the real mid-term truth of the value, it is so low that the banks would be bust (it certainly isn't 45-75% of face value).

There is no more assurance that the current market value is underpriced by risk aversion than that the real current market value will be overpriced in the auction because (a) they are in denial (b)values will probably continue to fall (c) the system might collapse if the value were known.

This is a shell game. If the 'investors' bid too low, the banks CAN'T sell and WON'T sell because it would destroy them. (In a real auction, the seller is setting a 'reserve' price higher than likely actual value.)

There is strong incentive to the investors however to overbid (above real value) because their potential losses are very limited and most of the loss will be born by the government - not this year, but pushed out into the future so it can be hidden from a currently angry Congress and public.

There is nothing honest about this, nothing transparent, and nothing that is progressive. It will choke off future government programs when the bill finally comes due and the current deficit explodes, and the Congress will know that this year and provide an excuse for not enacting the Obama budget at its current level for social investments.

Obama/Geithner have killed their own budget goose. All this to save banks they say are too big to fail but are (actually) too big to save because they are inherently threatening system failure.

What JimPortlandOR said. Bill Clinton made a devil's bargain with Wall Street in the months before he took office. For the Democratic Party, the forfeit for its embrace of Rubinomics is about to come due.

Go, Jim, go. :)

The other question is why the hell would private investors have a better idea of what these things are worth than anyone else? In most cases, banks didn't even keep loan tapes; they don't even know what the underlying assets are. Garbage in, garbage out. The free market is not magic. Investors aren't going to be able to accurately price these securities just because we set up a market for them.

Aaaaarrrrgggghhhh!

I'm sorry, but I can no longer engage in reasoned discourse. They've put a dress on this puppy, followed by big sunglasses, followed now by a floppy hat -- and it's still a dog.

Rick Taylor wrote, In most cases, banks didn't even keep loan tapes; they don't even know what the underlying assets are.

Are you shitting me?

Why shouldn't this be analyzed as though we have two investors -- one private, one the government.

Formally, it isn't set up that way, but isn't that what it amounts to.

The private investor can lose all the money he invests.

For that reason he will not be inclined to overpay.

I think the assumption in the main piece, and in comments, was that the private investor got all the upside. Don't believe that's the case.

It may be more likely that the private investor will underbid, or rather, correctly bid, than overbid.

No one knows how much these securities are worth. The banks didn't require loan tapes for most of them, so they have no records of the details of the underlying values the securities are based on. Why would private investors have a better idea than anyone else what these things are worth?

There is nothing honest about this, nothing transparent, and nothing that is progressive. It will choke off future government programs when the bill finally comes due and the current deficit explodes, and the Congress will know that this year and provide an excuse for not enacting the Obama budget at its current level for social investments.

Is the meme 'Obama is a Fox' still in play? Is anyone arguing that this is part of a long-term strategy to cut down the opposition and move towards 'real reform' when the time is right?

Iow, are there any provisions in play for determining if the so-called Geitner Plan is not working? Suppose we get to the end of July and nothing is happening? I understand that Christine Romer is 'incredibly confident' the economy will be back on track track by the end of the year. What would be the earliest time that one could say that this is just not happening?

Understand, I'm going with the guys who have a track record of being right - Krugman, et al - and I don't claim any special expertise. I suspect that they are right given their track records. But this plan seems like it's going to go through no matter what (I think it's the behind-the-scenes machinations that are really what have a lot of people worried.) So even though I think this plan is wrong-headed, I really, really, really hope that Krugman, Galbraith, etc are wrong and the administration is right.

Krugman, Baker, et al, are right as usual (they're the folks that have been right all along). Does anyone expect Obama/Summers/Geithner to just come out and say this is a rehash of the Bush/Paulson plan, an unbelievable taxpayer handout to Wall Street (including hedge funds), and that all historical evidence says it's doomed to very expensive failure?

Didn't think so.

So, to anyone with faith in this plan, please get your eyes checked (if you can afford it these days). That emperor walking down the street really is naked.

There is so much wrong with this plan. First, any plan that does not take a flame thrower to current bank management is not going to work. The banks made poor decisions in managing their risks and now the people who made those poor decisions are being sheilded from the consequences by their buddy Tim Geithner. Private Equity and distressed debt players have largely been on the sidelines. Some may participate in this program but most will not. They aren't interested in buying assets that are destined to fall in value even if the Government is willing to pick up 90% of those losses. There is but one solution to this problem and this an industry wide realization of the losses. As it stands now, counterparties to all of these toxic assets are being paid. Those counterparties are largely foreign banks and big institutional investors such as insurance companies and pension funds. They aren't being forced to accept less than they are owed because the US taxpayer is ponying up when the banks or AIG can't. If they were staring at the abyss, meaning the real prospect of a waterfall of defaults, they would likely come to the table and accept a major haircut. That is what is needed to fix the problem. Instead of that, we get the Obama team putting our current and future tax dollars at risk in a vein attempt to avoid the inevitable. It won't work and eventually these losses will be realized. Only when they are finally realized, we, the US taxpayer will be left holding the bag.

So, like Krugman, I believe the plan will fail, but not as catastrophically as Krugman believes. Krugman seems to assume the auction will proceed and the price of toxic assets will be initially propped up and later crash. I think the auction will never get off the ground and that this plan is a Spruce Goose.

I believe this because traders/investors don't want to lose dollar one, much less $15 even if that means Uncle Sam loses on $85 in the same deal. Misery may love company but when misery is as apparent as is the case here it is best avoided all together.

After the Spruce Goose failes to lift off, then perhaps we can go about doing what is required, cram down, receivership etc. The failure will be more in the form of wasted time not so much money.

The only people for whom participating in the auciton makes sense is the banks that hold the toxic assets. Bank A buys Bank B's, Bank C buys Bank A's, or maybe the rules allow Bank A to buy assets from itself. If the banks themselves are allowed to buy in the auction then this is the Government providing 85 cents on the dollar for piles of crap. If not then it will be a scarcely attended auction.

So, like Krugman, I believe the plan will fail, but not as catastrophically as Krugman believes. Krugman seems to assume the auction will proceed and the price of toxic assets will be initially propped up and later crash. I think the auction will never get off the ground and that this plan is a Spruce Goose.

I believe this because traders/investors don't want to lose dollar one, much less $15 even if that means Uncle Sam loses on $85 in the same deal. Misery may love company but when misery is as apparent as is the case here it is best avoided all together.

After the Spruce Goose failes to lift off, then perhaps we can go about doing what is required, cram down, receivership etc. The failure will be more in the form of wasted time not so much money.

The only people for whom participating in the auciton makes sense is the banks that hold the toxic assets. Bank A buys Bank B's, Bank C buys Bank A's, or maybe the rules allow Bank A to buy assets from itself. If the banks themselves are allowed to buy in the auction then this is the Government providing 85 cents on the dollar for piles of crap. If not then it will be a scarcely attended auction.

Read the current Wired cover story, "The Secret Formula That Destroyed Wall Street". Basically, we got into this mess when the investment bank managers started judging the risk of highly complex assets (CDOs, etc.) using a formula based purely on market pricing, not on any kind of real, thorough assessment of an asset's worth.

Now Geithner proposes to continue judging the assets' values using market pricing, instead of actually attempting to look under the hood.

Of course he doesn't even want to use real market pricing, because it would be catastrophically bad for the banks holding the assets.

So he proposes to "fix" the delusory behavior of the banks by adding a second layer of delusion on top of the first, rather than trying to dispel the fog and dig down to find the true worth of this junk.

bob: I think the auction will never get off the ground and that this plan is a Spruce Goose.

I hope you're right. The failure mode you predict is preferable to the one Krugman fears.

P.S. The Spruce Goose actually did fly. I'd rather have Howard Hughes running the show than the current bunch of clowns.

buy gold. maple leafs, philarmonics.

buy all you can. buy it now before everyone else figures out that it is the only asset that will retain its value in the financial maelstrom unfolding.

What you're missing is that what's being valued is a bond--it's a stream of future payments, all of which have some probability. You value it by setting your required return, and then discounting the payment stream back to the future. A better example is if I'm trying to value an asset that has a 50% chance of paying me $10 in one year, and a 50% chance of paying me $0. If I have a 25% required annual return and no leverage, I'd pay $4--my expected payoff after one year is $5, and I need to make a 25% return over that year. Now, let's say that I could get a loan of $4, but I now needed a 30% return (to compensate for the added risk of using leverage). My opinion about the expected payoff wouldn't change, but I'd be able to pay $4.77 for the asset.