They have avoided bankruptcy efforts so far, even where they made sense. I called for RTC-style solutions from the beginning, with a government DIP lender where systemic risk was a threat. It requires the least subsidy, and lets the consequences fall where they deserve to, while minimizing overall risk.

They’ve got great credentials — but the Obama economics team is acting like Bush-plus, and they get in each other’s way. I was never very optimistic, but I feel that there is little good that will come out of our government’s actions. The intermediate-term question is when does the Dollar break down?

Please comment further on the statement, “Price discovery from the auctions might force them to write up or down securities, …”

My impression is that if the banks can’t sell many of these securities under these subsidized conditions, they would be forced to further write down what’s on their books, forcing an RTC-nationalization. Is this Geithner’s real end-game? Heads we win, tails you lose. I’ve seen this strategy alluded to, but I haven’t seen anyone opine that this is precisely what Treasury’s tactic is. Thoughts?

The holding company post was very good as well.

Some of the banks will sell, partly because the subsidized price will be attractive. Anything that clears these securities and leads to normal lending will be good for the economy and for the market.

Because of the auction process, subsidized funding, and the free put option, this will tend to get the buyers to overpay, which might induce the banks to part with more dud assets. Then the pricing grids will reflect those overstated prices, making the banks look better than they should. The banks get time, but the underlying problems in the eventual cash flows don’t disappear.

Losses will get taken later by the asset managers, but mostly, by the government. Maybe things will be better then — some suggest that the economics team for Obama is merely playing for time and hoping.

Personally, I’d think the banks would test out the program by offering the lemons on their lot first. Another phenomenon of the introduction of a large new bid flush with cash is for the sellers to probe exactly how stupid the buyer wants to be.

And from the buyer’s POV in this case (speaking of the PIMCOs and BlackRocks of the world), a few initial overbids for dud assets are mitigated by the excess proceeds going onto bank balance sheets, thus reducing their large exposure to “sick bank” debt even if their equity in the dud asset is written off. Probably a net positive for them, given the leverage involved.

I’d be interested if the taxpayer is protected in the event of a single large “outlier” bid, which seems to be our biggest risk here. Interfluidity has a good, properly wary post on the subject.