First, some context here, even before Geithner’s plan, we should note that the taxpayer exposure in all this is, “$9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages,” or about $30,000 for every man woman and child in the US.

For what Geithner is proposing, we are looking at as much as another $2 trillion.

By comparison, the 2006 US GDP was a bit over $13 trillion, so all of this is a serious chunk of change.

The short version of his plan is that he wants to go with the bad bank, with a fig-leaf of subsidies to bring in “private” money, so my report of the CNBC story was wrong:

Officials said the plan was fashioned after a spirited internal debate that pitted Mr. Geithner against some of the president’s top political hands.

Some of President Obama’s advisers had advocated tighter restrictions on aid recipients, arguing that rising joblessness, populist outrage over Wall Street bonuses and expensive perks and the poor management of last year’s bailouts could feed a potent political reaction if the administration did not demand enough sacrifices from the companies that receive federal money.

They also worry that any reaction could make it difficult to win Congressional approval for more bank rescue money, which the administration could need in coming months.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

So it’s more welfare for fat cat bankers, in this case backstopped by, “The Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corporation might provide guarantees to investors.”

Nemo at self-evident does the numbers on how this will screw the taxpayers, and I cannot do better than his numbers:

If the Plan involves convincing private equity firms to take “first loss” position on the assets they purchase, and merely limits their downside with some form of insurance, does that make it a good deal for the taxpayer?

Well, let’s see. Suppose some insolvent bank, like Citigroup or Bank of America, has 10 mortgages or MBSes or CDOs. Now, nobody knows what any of these things is worth. Most of them are worth nothing, but some of them are probably worth something, depending on who defaults on what. Suppose, just for the sake of example, that each of these toxic assets has a 10% chance of being worth $100 and a 90% chance of being worth zero.

Obviously, a rational investor would pay at most $100 for the entire pool of 10 assets, or 10 cents on the dollar.

Now, suppose the D.C. branch of Goldman Sachs the U.S. Treasury comes along and offers to insure every one of these investments to the tune of $45 for any private equity firm who purchases the entire pool for $50/asset. In other words, the private equity firm is in “first loss” position on each asset to the tune of $5, while Team Timmay is on the hook for the remaining $45.

Since one of the assets is probably worth $100 and the other nine are probably worth zero, the private equity firm expects to make $50 on one and lose only $5 on each of the remaining nine, for an expected profit of $5 on their $500 investment. (Which they can lever up via the Fed, if the NYT is to be believed. Not to mention that this is just an illustrative example…)

Meanwhile, the taxpayers expect to pay insurance to the tune of $45 * 9 = $405. Thus, despite private equity being in “first loss” position, the most likely result is for the private firm to profit even as the taxpayers get hosed.

Change units to trillions, rinse, lather, repeat.

Now, it appears that Geithner plans to set up some sort of triage, he is calling it a “stress test”, to ensure that banks are strong enough to be a part of the program.

I’ll believe it’s something more than a cute phrase when they seize Citi as insolvent and start a serious criminal investigation of Geithner’s protege Robert Rubin, because the former is insolvent, and the latter is a crook.

I still say that the best solution is seizing insolvent banks, and breaking up the rest so that they are “small enough to fail.”

This has epic fail written all over it.

Barney Frank has a good basic idea, that of a federal regulator with the power to regulate all financial transactions with regard to systemic risk, and then he jumps the shark completely by suggesting that this regulatory authority be placed in the Federal Reserve.

Seriously. Much of the Federal Reserve has not only gone native, but are to some degree actually owned by the commercial banks.

Any organization that was headed by Alan “Bubbles” Greenspan 20 years should be kept as far away from managing systemic risk as possible.

It’s like giving an infant a loaded revolver.

It appears that Mssrs. Geithner and Summers are concerned about the increasing calls for bank nationalization:

Explicit nationalization of financial companies has little support among key Obama officials, sources said. Treasury Secretary Timothy F. Geithner and top White House economic adviser Lawrence Summers think governments make poor bank managers and cannot efficiently manage a vast number of institutions, according to some of their associates.

Because, as Atrios notes, “Has it occurred to no one that bank managers also make poor bank managers?“

Another danger is that by taking over a substantial portion of a bank’s stock and wiping out the investment of the firm’s other shareholders, the government could also precipitate a sell-off across the banking system as investors flee, fearing they could be next.

No, investors will flee because they believe the banks to be insolvent, because the US government won’t seize solvent banks. Even the Swedes didn’t do that during their banking meltdown in the 1990s.

The real problem is that the regulators, Geithner, Rubin, and their mentor Robert “Soon to be Indicted” Rubin, have gone native.

So Timothy Geithner will be free to do exactly what Hank Paulson did for TARP round 2.

Lovely.