The Baseline guys have a modest proposal which is quite reasonable – why not let individual investors buy the equity for these toxic assets?
If Geithner’s taxpayer subsidized toxic public/private plan goes forward, I think it would be fair if the federal government allow non-institutional investors to participate via a no-fee investment vehicle.
Problem is, this version will only add more fuel to the fire. The public cannot possibly know the composition of the lousy assets they are buying – the hedge funds won’t either, of course, but that’s the story. So all the public has to go off of is the assertion by Treasury that it is somehow getting a good deal.
And it is not. With explicit public investing, you will only have a bad bank scenario (at least non-depository): the legacy banks unload their junk to the public for a ludicrous premium, and in a few years the assets in the new entity fail and tear through the capital of the bad bank, safely far away from the going concern legacy banks.
Does anyone think the government would be any more able to let that new bank blow up and take its public shareholders with it, just a bunch of Joe the Plumbers who thought they were doing the patriotic thing by getting in on a boondoggle?
The entire plan is predicated on misdirection, because the government lacks the nerve to take over the banks and wants to relieve the pressure to do so.
