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Geithner Bank Plan Faces New Wave of Criticism

Economists say the proposal is likely to produce major losses for taxpayers as banks and investors game the system.
 
 
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Two weeks after being introduced, Timothy Geithner's bank rescue plan is facing a new round of withering criticism from economists who say the proposal is likely to produce major losses for taxpayers as banks and investors game the system.

In public writings and interviews with the Huffington Post, some of the same figures that issued early warnings about the current financial crisis now say that Geithner's designs for alleviating toxic assets from the nation's banks are inherently flawed. As evidence, they point to the massive amount of federal funding, in the form of FDIC backing, being offered to prospective buyers of toxic assets. It is the "closest thing to risk-free investing -- with leverage! -- around," wrote Andrew Ross-Sorkin of the New York Times.

More specifically, they have highlighted the seeming ease with which a bank could effectively drive up the price on an asset it already owns by creating subsidiary entities to bid on those assets. "The amount of potential rip-off in the Geithner-Summers plan is unconscionably large," said Columbia University's Jeffrey Sachs.

These critiques have produced a Washington rarity: the re-sparking of a debate that, in the wake of positive reviews from Wall Street, had largely subsided. Just as Geithner seemed to be finding his political footing, the spotlight has been placed right back on his cornerstone proposal, with critics calling into question both his projections and past testimony on the matter.

Geithner has long insisted that his hybrid plan -- which supplements private investors with large amounts of public funding as a way to create a market for toxic assets -- is the best way to clean the banks at minimal taxpayer risk. Indeed, during a relatively overlooked portion of Capitol Hill testimony on February 10, he insisted that the government would not be guaranteeing any portion of the private investor's purchase:

Sam Stein is a Political Reporter at the Huffington Post, based in Washington, D.C.