Fifty-one weeks ago Yves Smith ran a post about TARP 1.0 called “Why You Should Hate the Trea­sury Bailout Proposal.” She wrote (empha­sis mine):

The Trea­sury has been using the for­mula that it will buy assets at “fair market prices”….Yet as we dis­cussed, the plan makes no sense unless the Orwellian “fair market prices” means “above market prices”….[U]nlike the Res­o­lu­tion Trust Cor­po­ra­tion, which took on dodgy assets which had fallen into the FDIC’s lap due to the fail­ure of thrifts, and the Home Owners’ Loan Cor­po­ra­tion, which was estab­lished in 1934 after the hous­ing market had bot­tomed, this pro­gram is going to swing into action with the clear but not hon­estly dis­closed intent of buying assets at above market prices when future mar­kets and the ana­lysts with the best track records on fore­cast­ing this decline (you can add Robert Shiller, CR at Cal­cu­lated Risk, and Nouriel Roubini to the list) believe it has con­sid­er­ably fur­ther to fall. As we said ear­lier, this is a covert, not par­tic­u­larly well designed, inef­fi­cient, and unduly costly recap­i­tal­iza­tion of the bank­ing system.

Thanks to a new memoir by one of George W. Bush’s speech­writ­ers–an excerpt of which appears in the new issue of GQ–we now have con­fir­ma­tion that Yves* was exactly right. Here’s Matt Latimer describ­ing the prepa­ra­tions for the President’s tele­vised Sep­tem­ber 24 speech to the nation:

I’ve got a review of Walter Bagehot’s Lom­bard Street, his 1873 book about the British money market, up at Yves Smith’s Naked Cap­i­tal­ism blog today. Check it out…

Eliot Spitzer wrote recently about how sur­prised he was to read that Richard Posner no longer believes that free mar­kets are capa­ble or com­pe­tent to deter­mine CEO salaries and mutual-​fund fees:

Posner con­cluded that while judges shouldn’t directly review cor­po­rate salaries, evi­dence of unrea­son­able com­pen­sa­tion could be evi­dence of a breach of fidu­ciary duty. Yes, these are legal words, but they reveal a remark­able conclusion—courts should take a hard look at private-​compensation issues—and demon­strate how far, and rapidly, the world has shifted. The two issues Judge Posner examined—setting CEO com­pen­sa­tion at major com­pa­nies and deter­min­ing the fees to be paid to mutual fund-​management com­pa­nies on the base of tril­lions of dol­lars of mutual-​fund investments—are cen­tral to the gov­er­nance of our finan­cial system. It is remark­able that a leader in Chicago School thought would acknowl­edge that the market is so broken that it can’t be prop­erly trusted on those two crit­i­cal issues. Yet that is exactly what Judge Posner has concluded.

What Spitzer doesn’t tell you is how much better it gets.

(Click graph to enlarge)

To see why the Gei­th­ner plan is such a bad deal for tax­pay­ers, check out the chart above. It shows, in a highly schematic way, how much money the var­i­ous par­tic­i­pants of the Legacy Loans part of the government’s new “Public-Private Invest­ment Plan” (PDF) stand to to gain (or lose) given a range of outcomes.

I’ve listed all the assump­tions that went into making the chart toward the bottom, but to under­stand it you really only need to know a few things. The x-axis of the chart rep­re­sents the ulti­mate profit (or loss) that will be real­ized on a hypo­thet­i­cal toxic asset pur­chased for $100 today by the public-​private part­ner­ship. Every­thing to the right of $0 on that axis means that the asset will have made a profit when, some years down the line, it’s finally sold. So if you want to see what hap­pens if the part­ner­ship sells the asset for $120 in five years, you’d look at the $20 tick mark. Like­wise, every­thing to the left is a loss, so if the part­ner­ship sells the asset for $80, you’d look at the ($20) tick mark. The y-axis, mean­while, shows what each member of the public-​partnership–FDIC, Trea­sury Depart­ment, pri­vate investor–will make (or lose) given that ulti­mate turnaround.