THE GEITHNER-SUMMERS PLAN IS WORSE THAN YOU THINK

The Geithner-And-Summers Plan (GASP) to buy toxic assets from the banks is rightly scorned as an unnecessary give-away by virtually every independent economist who has looked at it. Its only friends are the Wall Street firms it is designed to bail out, say Laurence J. Kotlikoff, a professor of economics at Boston University, and Jeffrey Sachs, a professor of economics at Columbia University.

One defect is the systematic overbidding entailed by the proposal. Others have since made similar calculations, including Joseph Stiglitz and Peyton Young. The situation is even worse that it looks, however, since the GASP can be gamed by the banks that own the toxic assets to boost the purchase prices for their bad assets even higher than has been suggested to date.

Suppose that Citibank holds $1billion face value of toxic assets that will pay $1billion with 20 percent probability and $200 million with 80 percent; the market value is $360 million:

• The GASP calls on investors to establish a Public-Private Investment Fund (PPIF) to bid for the toxic assets.
• For each $1 that a private investor brings in equity to the PPIF, the Treasury [that's 'us'] will put in another $1, and then the FDIC will leverage the $2 in equity with $12 of non-recourse loans (6-to-1 leverage).

The Geithner-and-Summers Plan should be scrapped. President Obama should ask his advisors to canvas the economics and legal community to hear the much better ideas that are in wide circulation...

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image toon - 1st mny sclm bbro = Geithner puts fox in hen house