Confessions of a Money Manager: Geithner's gambit powering stock market

Little did I know when my New York friend Jeff Walkenhorst told me last
week

about the genesis of Treasury Secretary Tim Geithner's new program that it would ignite a 500-point burst for the Dow Jones Industrial Average when Geithner unveiled it Monday.

Walkenhorst told me that existing and newly formed private investment firms were being courted to participate in a market -- buying and selling -- for the toxic loans that are clogging the nation's banking system.

Geithner's newly announced financial rescue plan now includes what are called public-private investment partnerships. Before I go any further, let me tell you that Geithner's newly created partnerships have come under instant attack by such notable economists as Nobel Prize winners Joseph Stiglitz and Paul Krugman. They say the new plan is a gimmick that allows speculators to use taxpayer money to buy and sell toxic assets for a potential profit. Well, they're right.

However, making deals with speculators may be the only way that taxpayers will be spared from shoveling more bailout money to those debt-riddled banks. So before we make judgments, let's see the devilish details of this proposal.

We all know that major banks hold assets: packages of mortgages, consumer debt, car loans, and the like. We all know that the banks are earning some interest on these packaged loans, but the potential for default has made these loan packages toxic. Buyers are bidding 30 cents on the dollar, sellers are fearful of selling at such low prices that the mark-to-market accounting requirement would instantly impair the loans not sold and could force technical bankruptcy by the accounting loss of equity. So we have an impasse.

The government wants to buy these loans via funds provided by the Federal Reserve, the U.S. Treasury, and now the Federal Deposit Insurance Corporation, and the banks want to sell them. The problem is determining a true market price.

In steps, the public-private investment partnerships will invest some of their money -- 7 percent -- and the government's money -- 93 percent -- to buy the loans and, in essence, make a market in these toxic assets. What are the mechanics of this plan? Organized mayhem.

Remember that great movie "The Hustler"? The three principal players in this mayhem will be bank lending officers, partnership speculators, and government officials. Think of Jackie Gleason as the banker, George C. Scott as the government guy bankrolling the speculator, Paul Newman. They play pool for high stakes. Under Geithner's plan, these guys will be playing on boardroom tables, sifting through the lending documents, and exchanging bids and offers on loans. The Gleason bankers will want top dollar for their loans, the Newman speculators will haggle for lower prices, and the George C. Scott government guys will put up the bulk of the money to make the trades possible.