# More on the Geithner Put

There are three parts to the government’s plan:Â  A “stress test” and new capital injections for the banks; a “public-private investment fund” (“P-PIF”); and an expansion of the TALF to $1 treeellion. Let’s focus on the P-PIF for a moment.Â Although the details are not yet announced — because they are making this up as they go — there is already cause for concern.Â As JPMorgan’s analysts say: It should be noted that this planâ€™s so-called private sector pricing of assets would be directly related to how much leverage the P-PIF extends to private investors. Â The greater the share of non-recourse lending extended to investors, the higher will be the new â€œmarketâ€ price for assets. Â The dilemma that first surfaced last September â€” the higher the price the greater the support for the banking system, but also the greater the risk for taxpayers â€” is not resolved by the P-PIF but is instead transformed into a decision about how much leverage the P-PIF will provide to investors. This is a very important point, so I am going to belabor it.Â My apologies if this insults your intelligence. Let me go back to my earlier example:Â Suppose some bank is holding 10 bad assets, one of which is likely worth$100 and the rest of which are likely worth zero.Â  (And it is unknown which is good and which are bad; that will only become clear in the fullness of time.)Â  Now suppose Mr. Private Equity comes along and offers to purchase all of the 10 assets for $50 apiece, using$5 of his own capital and $45 borrowed from the P-PIF. If these loans are non-recourse — which every report suggests they will be — then what is the likely outcome?Â 9 of the 10 assets wind up worthless, and on each of them Mr. Private Equity loses his$5 and the public loses $45.Â The remaining asset turns out to be worth$100, so Mr. Private Equity repays the $45 loan, recovers his initial$5, and pockets $50 in profit. Thus the final result is that Mr. Private Equity put up$50 to earn $5.Â That is a 10% return; not bad. Meanwhile, the taxpayers are out$405.Â  ($5 of which went to Mr. Equity, and$400 of which went to the banks.)

I say again:Â  The most important question is who will pay for the losses that have already happened.Â  And I can pretty much guarantee it will not be the private equity folks…