Toxic Asset Plan

The wait seems to be over, as this week we can expect a final plan from the Treasury and Mr. Geithner about the over $2 trillion worth of toxic assets on the books of U.S. banks. The basic plan will involve using Government and private assets to buy bad mortgage debt from banks like J.P. Morgan, Citi, and Bank of America. The hope being that once these mortgages, both commercial and retail, are removed from the banks' balance sheets, they will be able to refill their coffers with private equity and begin to function normally again

The NYT reports that as of now, private funds have only been willing to relieve banks of these bad assets at no more than $0.30 on the dollar, while banks have only been willing to sell at $0.60 on the dollar. The hope is that this impasse will be bridged with the Treasury's plan

With only leaks on the plan available, Paul Krugman, and other notable figures, have already come out against it, in my opinion prematurely. Mr. Krugman's argument is that the plan will create an artificial market for assets, that in Krugman's opinion, are worth close to $0. However, the Governments argument has been that the assets are mispriced, and the reason transactions aren't happening is because of a lack of confidence and a market overreaction

I won't make a definitive opinion on the plan until I get to actually read it, but my initial thoughts are favorable, as my belief is that the inability of banks to relieve themselves of these mortgages is at the core root of the current financial dilemma. Though, I am concerned that taxpayers will end up paying higher prices for these assets than they are currently worth, as the Government will cover much of the losses of private money if the assets are overpaid for

The question remains, if $0.30 is too little and $0.60 is too much, what is a price that investors and the Government can make money on, but that won't destroy what's left of the banking industry, and lead us even deeper down the rabbit hole of recession