Digging Deeper on Geithner's Plan

I've been watching several excellent videos explaining the Geithner Public-Private Investment Partnership (PPIP) plan over at the YouTubes courtesy of Salman Khan of the Khan Academy. Khan explains things clearly and effectively with simple visual aids.

If you're confused about the plan (and confusing it is) then check out Khan's series. He starts off explaining the basics of how the plan works and then in "Geithner II" raises the disturbing point that these banks could buy these assets from themselves - via special investment vehicles, hedge funds, or other independent entities associated with the banks - in effect recapitalizing themselves by shoring up balance sheets with a fat government subsidy:



This does seem like an almost foregone conclusion unless the gov't can somehow prevent it through legal means...but I'm not sure they can. Even if the banks do an end-around here, it might actually work in terms of recapitalizing the banks and avoiding insolvency, but it would essentially be an indirect bailout, which is extremely distasteful right now. I'm more or less in agreement with Khan and the Krugman/Johnson camp - the sooner we nationalize these institutions ("nationalize" in the sense of putting them into FDIC receivership, recapitalization, and eventual reprivatization) - the sooner we can rebound from this crisis. Even if the PPIP works to keep the banks functioning, it does so at great expense to the taxpayer and does nothing to address the systemic risk of these "too big to fail" banks. I'd prefer the definite path of nationalization rather than this pseudo-nationalization by way of enormous gov't subsidy.

In his latest video, "Geithner 5: A better solution," Khan addresses the problem which the PPIP is intended to solve - that of a lack of information about these toxic assets and liquidity (ignoring for the moment the high likelihood that it's as much as or even more of a solvency problem than a liquidity one). He has a great idea, similar to the one I mentioned here, to open up the market to all investors and provide detailed information on all these toxic assets. Basically list these assets as shares of corporations (owned by their respective banks) on the New York Stock Exchange and allow anyone to purchase shares. At the moment these assets are only available to institutional or large net worth investors via hedge funds and the like; mincing them into thousands of shares would allow access to Phil Everyman. Aside from the idea that individual investors should be able to receive the benefits of the "Geithner put" just like hedge funds, Khan's idea solves both the lack of information and liquidity problems:



There are details to be worked out in the execution, of course. The analysis and summaries of the assets as he describes would take some time and a lot of hard work on the part of some smart people, but it's something that, once done, would allow any individual with a modicum of means to invest in these assets.

I find this stuff fascinating, intimidating, and troubling all at once.