Secretary Geithner has put forth yet another version of the bad bank plan. Several pundits have already pointed out shortcomings in the bidding process.
So far, none of the discussions that I have seen are including the possibility that both the buyer and seller might have related interests. For instance: Citi will invest $1B with a fund that bids on the assets. The gov't will provide another (say) $9B to match Citi's $1B as a nonrecourse loan.
Citi will then provide personal incentives for the fund managers to bid 100 cents on the dollar for an BBB MBS tranche that is currently trading for 1 cent on the dollar. Naturally, the market is valuing this tranche at 1 cent because there is no hope of being paid back, and the tranche will eventually be a total loss.
But when that total loss occurs, Citi now only loses 10 cents on the dollar because the gov't just put up the other 90 cents.
This plan is in fact relying on disguised interests to bid the prices up to absurd levels and have the taxpayer foot the bill.
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