Saying the stock market loved the Treasury Department's new $1 trillion toxic asset-buying plan risks understatement. Swooning in adoration is a better description of a day that ended with Bank of America's share price leaping by 26 percent.
But there's less reason for taxpayers to feel the love.
The Obama administration's "Public-Private Investment Program" is complicated, and not all the details of implementation have been made clear. It's probably fair to say, though, that its foundation rests on two premises: first, that Americans will not continue to walk away from their mortgages and home loans held by banks will retain value, and second, that investors are being unreasonably pessimistic in the value they place on those loans today.
Treasury Secretary Timothy Geithner's answer is to create a complicated system that will risk taxpayer funds on what used to be called "troubled assets" or "toxic assets" (and are now being called "legacy assets"). A Treasury fact sheet says the goal is "to cleanse bank balance sheets of troubled legacy loans and reduce the overhang of uncertainty associated with these assets."
It effectively bails out banks that made terrible bets -- like assuming that housing prices would always rise and never fall -- and have been left with the financial equivalent of a steaming pile of dung that nobody really wants to touch.
That effect is what sparked a kind of stop-the-bailout outcry in the last few days, even from liberal and progressive commentators who have been steadfast supporters of the Obama administration on economic issues.
Dean Baker, co-director of the Center for Economic and Policy Research in Washington, D.C. wrote that the program ignores the existence of the housing bubble. "A further 20 percent decline (in home prices) will hugely increase the percentage of mortgages that are underwater, reducing the value of mortgage backed securities from their current level," he wrote. "There is no obvious reason that house prices should then again rise above their trend level."
New York Times columnist Paul Krugman said that "Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets" -- arguing, basically, that bad banks should be nationalized instead.
Duncan Black, who uses the pen name Atrios, said it would "funnel more government money to the banksters" and allow "too big to fail businesses to stay in business for a bit longer."
(Banks have been unwilling to sell bad loans for fear that reporting large losses could endanger their solvency and expose them to FDIC action. So even if they're linked to heavily-foreclosed-on subprime mortgages and worth only 30 cents on the dollar, banks have nevertheless been hesitant to sell their toxic assets.)
Not only could the latest bailout cost taxpayers money, but it could enrich investors at the same time.
Some calculations suggest that banks and other investors could reap handsome profits at taxpayer's expense. In one scenario, an investor could buy loans for $8,400, sell them for a profit, and stick the FDIC with a $3,600 loss. Others have raised alarms about the mechanisms through which banks could unload toxic waste onto taxpayers.
While the prospect of gaming the system (and the Treasury) could be attractive, investors do have to worry about the political risk. If they make a killing, might they have to worry about 90 percent tax rates? How about street protests and subpoenas? The prospect of Rep. Barney Frank demanding to know details -- under oath -- at a congressional hearing may turn out to be taxpayers' best, and only, insurance policy.
Declan McCullagh is the chief political correspondent for CNET and writes a weekly column titled Other People's Money (RSS). His e-mail address is email@example.com