How the Geithner´s plan is supposed to work (PPIP)

The plan does, indeed, put more taxpayer money at risk. Geithner plans to use $75 billion to $100 billion in the existing Troubled Assets Recovery Program as seed money for a new private/public partnership that would buy up, through auctions, any bad loans banks wanted to dump off their books. The auctions, theoretically, would help set reasonable prices for the loans; right now, many banks are still accounting for them at face value, even if they represent foreclosed mortgages, but no one believes they’re actually worth what they once were. Private investors would lend the public/private fund money, backed by the Federal Deposit Insurance Corp., to buy the loans, and the government would put up half of the actual cash in the deals.

In an example Treasury officials used, a bank decides it wants to sell off a pool of bad mortgages with a face value of $100. The government auctions the mortgages, and the highest bid is $84 (which means the bank loses $16, instead of the whole $100 on the line now). The FDIC backs $72 worth of loans for the public/private fund to buy the mortgages, meaning the public/private fund has to come up with $12. Treasury kicks in $6 and private investors kick in $6. If the mortgage can eventually be sold for more than $100, everyone wins — the private investors get a big gain after risking only $6 of their own money, the Treasury gets the same gain, and the FDIC never has to take on the $72 in loans it guaranteed because they’re repaid once the mortgages are resold for a profit. But if the mortgage winds up losing money, the private investors are only on the hook for $6. The FDIC has to repay the $72 in loans regardless.

Obama has already proved himself to be the best salesman for his administration’s policies, and conveniently enough — but certainly not coincidentally — he’ll hold another prime-time news conference Tuesday night. Asked by a reporter after his photo op with Geithner Monday how he could reassure skeptical taxpayers, Obama said to wait. “You know,” the president demurred, “I’ll have a full press conference tomorrow night, and you guys are going to be able to go at it.” Geithner’s plan may not have won over everyone yet, but if nothing else, it bought the administration time to let the boss pick up the job where the treasury secretary left off.