Current markets value toxic mortgaes 30 cents per dollar. Banks could sell them at 60 cents per dollar. There is 30% gap in the price.

Why banks can’t sell them in market prices? Because all those mortgages are valued in their books well above their value. If banks would down write them, it would result instant bankruptcy (selling them leads to same result). Obama’s plan tries to find way to inflate prices so much that banks could sell. The plan is to give investors loans that don’t have to be paid if mortgages end up being overvalued (loans are secured only by the value of the mortgage assets being bought.). Basically they ask them to gamble. You put small % of them money and we provide you the rest 97% as hedge. If you win, you win huge. If you lose, you just walk away. With hedges this big and risks so limited, some hedge funds might accept deals with less than 50% change to succeed. It all boild down to valuation, risk analysis and decision theory.

Only clean solultion would be to nationalize them. Just like Reagan did with Loans&Savings. If they need government money, force them to down write bad assets (bankruptcy), guarantee their debts, zero stock values and take over.

The reason that Geithner’s plan, which isn’t all that different from the one that he and Hank Paulson came up with back in October by the way, is a bad one is that he’s essentially betting about a trillion dollars in taxpayer money that it will work.

If and when it doesn’t, it will be the taxpayers and not the private investors who will be left holding the bag.

And don’t even talk about what we’ll do if it does fail, because by then there won’t be any money left.

And don’t believe me, ask Paul Krugman.