Felix Salmon is worried about the part of the Geithner plan intended to move bad loans off the banks' books:

Using some pretty reasonable assumptions, the PPIPs [the partnerships investors will form with the government] aren’t going to buy these loans until they drop to the low 80s — which means that there simply won’t be a market-clearing price [i.e., a price at which they sell] for most of the loans. [Most banks seem to be pricing the loans at 90 cents on the dollar or more.]

But what happens if one or two desperate banks end up selling loans at say the 82.5 cents on the dollar which Accrued Interest reckons would be a reasonable price? Since the whole point of this program is to provide price discovery, wouldn’t that mean that the rest of the banking system would have to mark their loan books to the newly-discovered valuations? ...

[W]hen it comes to the government’s stress tests, it’s going to be hard for the banks to persuade Treasury that the loans are worth significantly more than anybody is willing to pay under the PPIP. So if the loans don’t clear [i.e., no one sells], that could be prima facie evidence that the banks are not actually as solvent as they say they are. Which could be a nasty unintended consequence of this whole plan.

Is that really such a nasty consequence? Or, for that matter, unintended? If the Geithner plan establishes once and for all that certain banks are insolvent and in need of recapitalization (and perhaps seizure/nationalization), that strikes me as a decent first step. Particularly if the alternative is pretending the banks are solvent when they're not.

--Noam Scheiber