Public Funds on TAP or Geithner’s Toxic Asset Plan (TAP)

Treasury Secretary Geithner is proposing the use public funds to provide financing and guarantees to private investors (hedge funds) to buy mortgage backed Toxic Assets. The problem is how to set a fair market price for these assets. The Banks are lobbying for relief from mark-to-market accounting practices because the market conditions are driving the market price of these assets to a mere fraction of their purchase price. However you establish the market value of these assets, the investors want to buy them at a price low enough to ensure that they can sell them at a profit. If the price is too low, the banks won’t sell or if they must sell at the low end of the price range for these toxic assets it will further jeopardize their solvency. If the price is too high, the investors (hedge funds) will require greater amounts of public funds and better government guarantees to manage their risk in purchasing these toxic assets. Greater access to public funds and better government guarantees means greater costs to the taxpayers. This difficult problem is made even more complex by the fact that:

The housing market hasn’t bottomed out yet.

Many homeowners are ‘underwater’ meaning they owe more on their mortgage then their home is worth and many are at risk of ‘walking away.’

Unemployment is rising and some say it will exceed 10%.

There are greater numbers of foreclosures yet to happen.

There are few home buyers in the market.

Investors have no confidence in the regulatory agencies or their regulations and their ability to protect investors.

Investors have no confidence in the firms/agencies that rate investments.

Investors have no confidence in the financial institutions, elected representatives, regulatory agencies, the justice department, or the courts.

The taxpayers, investors, entrepreneurs, and consumers have no confidence in Secretary Geithner, the Treasury Dept., the SEC, Congress, or the new administration.

In the absence of FDIC actions to take over these banks what could Secretary Geithner possibly say or do to regain/rebuild our confidence in the financial markets and the government’s ability to effect corrective actions? In my opinion, Secretary Geithner is part of the problem and not part of the solution.