Jeffrey Sachs: Geithner Plan Is Unconscionable Rip-Off

This developing, weeks-old story is more scary that a bio-engineered, airborne Swine Flu virus invented by a bio-terrorism novelist.

See John Carney's Jeffrey Sachs: Geithner Plan Is An "Unconscionably Large" Rip-Off in Business Insider, and Sachs' piece at Huffington Post. Read his piece a couple of times.

I hope Sachs is way, way off.

Chadwick Matlin has the knockdown of Sachs' concerns at The Big Money from Slate, which you should probably read about three, four times.

Writes Matlin:

... (L)ast time we checked, functional markets have banks buying and selling things with other banks. If we're trying to return to normalcy, why would we stop the very mundane and typical process of banks buying and selling from other banks? Yes, taxpayer money is involved, but it would be involved with whoever bought the assets. I'd rather bail out the banks a little bit further than enter into new pseudo-bailout contracts with hedge funds, who will make the politically deaf banks look like saints.

Some of the attacks rightfully focus on the possibility of collusion. If the banks are buying from one another, they may agree to set a floor for their bids (60 cents to the dollar, when they're really worth 30 cents, for example), then the assets will still be overpriced. If the assets are still overpriced, then we're back where we started from, with immobile assets stuck on balance sheets, slowly draining the life out of zombie banks.

This, though, jumps the gun in two ways. First, we don't know that the banks are colluding. Profit motives suggest that they would, but political pressures suggest they may not be. And it only takes one rogue bank to underbid the cartel and sabotage the plan.

Second, and more likely, the government could set a ceiling to the price of the assets. To understand what this would entail, think about an eBay auction, in which oftentimes the seller will set a price minimum. The minimum prevents the good from being sold unless the winning bid clears the threshold. The Treasury is conducting a reverse auction, so it would set a price maximum, not a minimum. It would say that an asset could not be purchased for more than, say, 40 percent of its original price.

This would warp the market, certainly, but it would also prevent collusion. Plus, it would allow the banks to start acting like banks, just like they were before the crisis hit. That would be good for everybody's confidence.

One thing is certain: Nothing is clear and certain.