Regular readers will remember that I have not exactly been a fan of Timothy Geithner‘s from the very beginning. Way back when he was still just a gleam in Barack Obama‘s eye, I wrote: “I challenge anyone to actually explain what makes Geithner so uniquely qualified.”

It’s now becoming increasingly clear that his deepest qualifications consisted of his unquestioning allegiance to the Investment Bankers’ Benevolent Association, his sincere commitment to viewing the world through the same lens as Larry Summers, his passionate devotion to protecting the wealth and position of their Wall Street cronies at all costs.

The latest example is the so-called Toxic Asset Plan he will formally unveil today. The reactions to sneak previews have almost uniformly been strongly negative. It’s becoming more and more clear that Geithner’s guiding principle in addressing the financial crisis is: “First of all, do no harm. To Citigroup, Goldman Sachs, Merrill Lynch, etc.”

Of course, somebody has to get screwed in this process. Since there doesn’t seem to be any viable candidate other than taxpayers, so be it.

Matt listed some of the negative reactions on Saturday:

For more reaction to Obama’s “plan”, check Paul Krugman, Jamie Galbraith, Dean Baker, and Yves Smith.

Here are a couple more: Calculated Risk, John Cole. It’s really hard to find a respected economist who thinks much of Geithner’s plan. About the only exception is Brad DeLong.

Krugman put it as well as anyone else (this is a different piece from the one Matt referenced above):

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad — I mean misunderstood — assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem.

And even Brad DeLong notes that Geithner’s plan rests on the key assumption that the toxic assets are fundamentally undervalued. What happens, he asks, if “the assets are not fundamentally undervalued, and even when held to maturity the government doesn’t make back its money?” The not exactly reassuring answer:

Then we have worse things to worry about than government losses on TARP-program money–for we are then in a world in which the only things that have value are bottled water, sewing needles, and ammunition.

It may be smart to start stocking up on sewing needles and ammunition. And figuring out the best method for long term storage of drinking water.

Because everyone seems to agree that the most critical issue is who really misunderstands the toxic assets—Geithner or everyone else? And it’s not as if we don’t have any evidence one way or the other:

The central Treasury assumption, at least for public consumption, seems to be that the underlying mortgage loans will largely pay off, so that if the PPIP buys and holds, at an above-present-market price governed by auction, the government’s loan to finance the purchase will not go bad.

Recovery rates on sub-prime residential mortgage-backed securities (RMBS) so far appear to belie this assumption. IndyMac lost $10.8 bn on a $15bn portfolio (and if you count the wipeout of equity, the total loss is about $12bn). That’s an 80 percent loss. It’s possible that recovery rates at other banks will be better, but how can we know? No one is examining the loan tapes.
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If I’m right and the mortgages are largely trash, then the Geithner plan is a Rube Goldberg device for shifting inevitable losses from the banks to the Treasury, preserving the big banks and their incumbent management in all their dysfunctional glory.

That’s why most of the knowledgeable people who are smarter than you and me are very, very worried about what Obama-Summers-Geithner are poised to do.

And “preserving the big banks and their incumbent management in all their dysfunctional glory” is also where we came in…