Geithner's bankrupting bailout: Blodget

by Rebecca Cole

Disgraced former Internet analyst Henry Blodget, now reinvented as a Wall Street commentator and blogger, said todaythat Treasury Secretary Tim Geithner's complicated plan to fix the banks will do the opposite: it will bankrupt them.

Geithner's plan for a public-private partnership to buy bad bank debt was greeted with a huge Wall Street rally on Monday -- that plus a positive increase in home sales pushed the Dow Jones industrial average up nearly 500 points. His public-private investment program calls for government to incent private investors to buy toxic assets and help the ailing banks get $1 trillion off their books.

The problem with the plan, Blodget writes, is the "gap between what banks say their assets are worth and what the market says they are worth'' -- say 60 cents versus 30 cents. And unless taxpayers are stuck covering the entire spread, banks selling assets at reduced prices will still have to take massive writedowns.

Blodget, now CEO & editor-in-chief of The Business Insider, an online business news site, was castigated for his role in pumping tech stocks during the dotcom boom. Yet the former Merrill Lynch rainmaker has made a name for himself covering the financial industry.

"This risk to the banks is particularly acute when dealing with whole loans that the banks currently say they have no plans to sell," Blodget writes.

"These loans are often carried at 100 cents on the dollar, because loans classified as held to maturity don't have to be marked to market. Even subsidized buyers won't likely be willing to pay anywhere near 100 cents on the dollar for these loans. So, here, the writedowns could potentially be huge."

Banks would be wise to not take Geithner up on his plan, Blodget writes -- and that's "why the government is already talking about forcing them to."

As the Financial Times reports, the U.K. did something similar last fall when it insured bad loans at the Royal Bank of Scotland and Lloyds -- with negligible results.

"Both schemes work on the same general principle: that banks will start behaving normally again and drag the rest of the economy with them if only they can be protected from their past mistakes," Dan Roberts wrote in The Guardian. "But these responses underestimate the scale of this crisis."

A headline from yesterday's Guardian: "Deflation returns to UK after nearly 50 years."

Is the U.S. next in line?