Geithner: My Plan for Bad Bank Assets - WSJ.com
From what I understand from this piece, this plan deals with the capital structure of the funds that will purchase the assets, but not the mechanism through which the asset prices will be formed, i.e how the funds will price the assets...Umh...OK.
It seemed to me that the pb is not that there is no money out there, but that money does not want to touch those toxic assets and that the role govt in this is to come up with an efficient pricing mechanism that restores liquidity.
A few hours later,...
Well, in fact this plan is still a big unjustified subsidy to Wall Street compared to what I have proposed. To make it easy, consider this
Suppose you want to buy to buy a toxic asset T. You think that when you dispose of it in a year it will be worth $110. How much will you be willing to pay for it today? It all depends on the cost of borrowing. If you can get a 0% loan you can pay up to $110. If the interest rate is 10%, you will not pay more than $100 for T. So the lender who lends you money at 0% when the market on such loans is 10% is giving you a subsidy that you will share with the asset T seller. Furthermore lending such subsidized money to more than one potential buyer will ensure through competitive forces that the bulk of the subsidy is passed on to the seller. That's probably why Wall Street cheered today..
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