Treasury Secretary Geithner finally released his plan to deal with bad bank assets. You can (and should) read Secretary Geither’s executive summary of his plan in the Wall Street Journal here.

After going on at length about what a bang-up job Treasury’s been doing on the economic crisis to date, Secretary Geithner lays out his Public-Private Investment Program (“PIP”) to deal with bad bank assets. It has three prongs, all of which ignore the central existing problem (supply side, not demand side). First, the government will lend money to the enterprise. Second, the feds and industry will share the risk and the reward. Third, the private entities will determine the price of the assets.

‘Puter is familiar with the secondary market for middle market paper, and understands the market for securitized debt. The market Geithner claims to want to establish already exists. Many private entities are waiting to purchase exactly the type of paper Geithner wants the banks to shed. The problem? The banks don’t want to sell the paper at the price buyers are willing to pay, most likely because of the detrimental impact a low sales price for sub- and non-performing paper will have on banks’ capital requirements. Markets require a willing buyer and seller. Because of fed and state regulatory requirements on banks, banks are currently unwilling to sell.

Geithner either (1) doesn’t understand the problem or (2) does understand the problem and is blowing smoke. ‘Puter thinks it’s simply Secretary Geithner’s (and the Democrats’ generally) demand side myopia.

Here’s ‘Puter’s Plan, which he may have mentioned in passing before. Rather than have the government work on the demand side (‘Puter’s theory is that the demand exists, and no action is necessary), have the government solve the supply side problem through its existing regulatory framework. There’d be no need for more laws, though perhaps more bank regulators would be needed to implement the ‘Puter Plan.

Bank regulators would set a firm framework for classifying all bank assets including toxic assets. These requirements would be applicable to all banks, such as “assets more than 90 days past due with greater than 80% loan to value must be reserved at 100% of face or sold.” Many banks would not be able to hold this paper because they would not have sufficient capital. The government would use the FDIC to liquidate the paper in a public auction environment, available to qualified bidders under existing FDIC rules.

FDIC (already existing and set up to liquidate banks and paper) aggregates the toxic paper and sells at a massive nationwide or regional auction(s). There would be no reserve at the auction, and it would be a Dutch auction (price descends from par, first bidder takes at that bid price). Banks would get whatever proceeds their paper brought. Feds would loan funds to qualified prosepctive purchasers at 4% over its cost (now in a 0%-.25% range) to incentivize participation. A low(er) cost of funds to prospective buyers allows them to bid more and still achieve their target yield on the purchase.

After the auction(s), banks would recapitalize to meet existing regualtory guidelines, either through selling shares, or, failing that, would be purchased by surviving banks or liquidated by the FDIC.

The’Puter Plan has the benefit of certainty. All the known bad paper would be out of banks at market prices. Banks would get the market value for their paper. No new governmental entities would be created. Further, the taxpayers would be getting bonds (essentially) earning 4% from the purchasers of the bad debt. In theory, this is a far better risk than continuing to shovel money into banks, and a lesser risk than partnering with potential investors in the first instance. If the investors default, the taxpayers get the collateral paper, and they are no worse off than they would have been Under Geither’s PIP.

The ‘Puter Plan may cause certain banks to be liquidated. It is a very real risk, but these banks are effectively walking dead now. Recognizing and acting on this fact is better for banking in the long run. See, e.g., Japan in the 1990s.

Recognize the facts as they are, not as you wish them to be. Determine a course of action, and act. Preserve the free market fundamentals, while recognizing a place for government intervention in a crisis. Each of these maxims is covered under the ‘Puter Plan.

President Obama and Secretary Geithner have been doing a great Hamlet impression, dithering and flip-flopping, and it’s left our markets depressed.

** Caveat: ‘Puter doesn’t claim to have all the answers. He simply believes the ‘Puter Plan is more realistic with a greater chance of success than the Obama/Geithner PIP.

'Puter

Always right, unless he isn’t, the infallible Ghettoputer F. X. Gormogons claims to be an in-law of the Volgi, although no one really believes this.

’Puter carefully follows economic and financial trends, legal affairs, and serves as the Gormogons’ financial and legal advisor. He successfully defended us against a lawsuit from a liquor distributor worth hundreds of thousands of dollars in unpaid deliveries of bootleg shandies.

The Geep has an IQ so high it is untestable and attempts to measure it have resulted in dangerously unstable results as well as injuries to researchers. Coincidentally, he publishes intelligence tests as a side gig.

His sarcasm is so highly developed it borders on the psychic, and he is often able to insult a person even before meeting them. ’Puter enjoys hunting small game with 000 slugs and punt guns, correcting homilies in real time at Mass, and undermining unions. ’Puter likes to wear a hockey mask and carry an axe into public campgrounds, where he bursts into people’s tents and screams. As you might expect, he has been shot several times but remains completely undeterred.

He assures us that his obsessive fawning over news stories involving women teachers sleeping with young students is not Freudian in any way, although he admits something similar once happened to him. Uniquely, ’Puter is unable to speak, read, or write Russian, but he is able to sing it fluently.

Geep joined the order in the mid-1980s. He arrived at the Castle door with dozens of steamer trunks and an inarticulate hissing creature of astonishingly low intelligence he calls “Sleestak.” Ghettoputer appears to make his wishes known to Sleestak, although no one is sure whether this is the result of complex sign language, expert body posture reading, or simply beating Sleestak with a rubber mallet.

‘Puter suggests the Czar suck it.