Upcoming: Ultimate Bank Bailout

As piecemeal rescue plans sputter, Washington is moving toward a consensus on a huge public-private partnership to strip banks of bad assets and get them moving again.

Like spoiled children of families facing hard times, financial institutions have whining about their allowances and the chores they have to do to earn them. Some are stamping their feet and returning or refusing to take the money.

In the face of public outrage, the government has been demanding more and more reform--delaying evictions and modifying mortgages for strapped homeowners, letting shareholders vote on executive pay packages, cutting dividends and canceling expensive junkets.

As banks reach out for help but complain about the strings, the outline of a simpler but more drastic approach is taking shape, as Sheila Bair, head of the FDIC, and others have been suggesting in recent days.

The government would partner with private investors to buy troubled assets, in part by providing financing at low cost. Federal officials are debating the amount of the subsidy that would allow investors to pay higher prices, limiting the losses that banks would record but also exposing taxpayers to greater risk.

"You end up with two healthy institutions," Bair contends. "It's not a good bank and a bad bank; it's an aggregator bank with good upside potential because it bought at good discounts and you've got a clean balance sheet over here with an opportunity to raise private capital."

But critics like Paul Krugman will take a lot of convincing. He contends that "by using taxpayer funds to subsidize the prices of toxic waste, the administration would shower benefits on everyone who made the mistake of buying the stuff. Some of those benefits would trickle down to where they’re needed, shoring up the balance sheets of key financial institutions. But most of the benefit would go to people who don’t need or deserve to be rescued."

In any event, when the administration decides on the right formula, perhaps in the next week, the Ultimate Bailout will be unveiled for a global vote of confidence--by investors, politicians, the financial industry and world markets. That tally will tell us much about where the economy is headed and for how long.

Bank Rescue: Tim Geithner's Times

The Treasury Secretary is announcing his plan to save the banks this morning, but the New York Times has it all before he says a word.

A front-page story reports that "Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

"He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid."

On the editorial page, David Brooks, without bothering to tell us how he knows, offers Geithner's thinking about the process with direct quotes:

"The key, he says, is to create 'massive, sustained and substantial macroeconomic policy' that would pump capital into markets to get them working again. The heart of his program is a series of public-private investment funds...One would acquire toxic assets. One would foster consumer and small-business lending. 'There’s a lot of private capital out there that wants to come in. It just can’t get the financing,' Geithner insists. The new programs would encourage private investors, and then once the markets are unfrozen, would 'get out as quickly as possible.'”

With all this inside information, it's not surprising that Brooks finds "Geithner’s plan is huge but also disciplined. It’s designed by someone aware of government’s limitations."

If Treasury's attempt to make its new bank rescue plan seem tempered rather than toothless is half as successful in the real world as it already is with the newspaper of record, we can all stop worrying without bothering to listen to what Geithner himself has to say today.

Who knew it was going to be this easy?