Say there was a plan where you could put down as little as 5% toward purchasing an asset and someone else would kick in another 5% to match.  That match would get you up to 10% down.  Then you could borrow up to 90% and buy the asset.  You make a bet with regard to how much value that asset will bring you and what you think you might be able to sell if for if you had to.  

That pretty much sounds like the Geithner plan for getting toxic assets off the books of the large money-center banks in the US.  In the Geithner plan, private investors such as hedge funds invest along side the government to try to create "price discovery" of what these toxis assets are worth.  Beyond all the complexity, the plan essentially tries to get a market mechanism to figure out how crappy all the loans these banks have made are.  There are legitimate concerns about banks gaming this system, but we'll leave those along for now. 

But if you change some of the percentages a bit and a few of the names of the players, you get something that sounds a lot more familiar.  The Geithner plan is illustrative of our own mini-Geithner plans which we've engaged in over the past decade or more.  Yes, we were all able to participate in our own little versions of the Geithner plan.  We put down up to 20% on a house (many people put down much less), then the government invests along side us in the form of an interest expense deduction which is essentially a subsidy.  Then the bank comes in and provides the leverage to buy the house with shockingly low interest rates courtesy of the FED.  If things go south we can walk away having lost some portion of our money.  We're still not interested in walking away and losing money, but at some point we'll do it.  At some level there are a lot of little Geithner plans going bad right now.  In this case, the banks and individuals are taking it in the shorts.   In a market where there is no gaming of the system and where people feel there is downward price pressure, the hedge funds investing as part of the Geithner plan would be at least somewhat motivated to price these assets conservatively.  Just as we didn't want to lose our 20%, the hedge fund players don't want to lose their upfront inevestment either.  And, just as home owners are now more apt to under bid versus over bid, this psychological motivation should still exist and apply to the hedge fund managers.  These factors still may give the Geithner plan a chance of working in a way that is favorable to tax payers.

And we should want any such plan to work.  The banks aren't as remote a set of despicable entities as we may want them to be or as they may seem.   As individuals fail to pay their loan obligations for a variety of contemptable and understandable reasons, we all end up on the hook.

For example, you put $5,000 in your checking account at Bank of America (or other similar bank).  Bank of America kept about $500 on hand and loaned out the remaining $4,500 to some guy who can't pay his mortgage on some McMansion in Plano, Texas.   Yes, we're all FDIC insured, but we all really want that guy to keep paying his mortgage.   The Geithner bet is that just as in the good times assets become over priced, in bad times; their prices are artificially low.  That's essentially the bet.  Ideally, the stress tests and Geithner's Public-Private Investment Partnership determines which banks are solvent and which ones are not.  Solvency depends on whether they have a performing loan portfolio (along with other held assets) that outweigh liabilities including those obligations to depositors and creditors.    If the banks were to be nationalized and the loan portfolios (including home, car, auto, commercial, et al) did not perform, the hole would have to be filled by the government anyway.  Even if you wiped out the equity of the shareholders and the liabilities to bond holders, you would only fill in a portion of the hole and undermine some confidence in the banking system.  The Geithner plan cleans up relatively healthy banks and reveals truly unhealthy ones.  Upcoming legislation regarding bank holding company nationalization will pave the way for greater intervention in these insolvent institutions.  As a side note, Bill Moyer and William Black are just plain wrong when they claim nationalization is easy and possible for large banks right now.   Bank holding companies are like investment banks and do not go into FDIC receivership...and at this point there are not many mergers left to be done to protect depositors in the event of bank failures of massive institutions.  In addition, one of the biggest fools in this parade is AIG which is not even a bank so such notions of nationalization still do not apply.

If the major banks are as insolvent as many suggest, then we're likely in big trouble.  Some are too deep into mortgages, others credit card lines, some autos, still others commerical real estate (or combinations of these).  Either way, non-performance of these loans (to us, by the way) means that the depositors money never makes its way back to the bank.  If all these banks are in extraoardinarily bad shape, then the obligations are massive.

The chart above is a bit dated, but it suggests that the obligation to depositors (assuming everyone conforms to FDIC limits...and depositors means us poor f**kers) is several trillion dollars.  Clearly, the banks' assets are not worth zero.  But when one looks at the problem, at least a little pity has to be extended to those trying to fix this mess.  But more importantly, we and the banks are ultimately a lot less about us and them.  We all participated.  It's too convenient and intellectually dishonest to simply cast the banks out as the pariahs or villians in this story.  Main Street and Wall Street are inextricably linked and mutually culpable.  A lot of us had our own personal Geithner's plans which we screwed up horribly.  We should hope the hedge fund investors do a better job.