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Brad Delong Explains The Bank Plan My basic read, in the context of my earlier post, is that the government financing is supposed to drive up the price of the toxic assets pretty high, maybe high enough to make the bank's balance sheets look okay (albeit at the cost of a big taxpayer subsidy). Per DeLong:

The fact is that the Geithner deal will have highly positive expected returns for the private partners even if the expected returns on the investment are negative. Loss limited to 3% of the investment and gain equal to 17% of the gain is an extremely valuable Geithner put. This means that, if the private partners really are experts and know what assets are worth in expected value, they will pay more and the US government will have large expected losses. ... I'd guess that they are willing to pay double their estimate of the expected hold to maturity value, because of the value of the Geithner put. [emphasis added.]

Update: Krugman responds here.

--Noam Scheiber