It is astonishing that after months of deliberation the Obama administration has funked radical action to rebuild the broken US financial system on a rational and sustainable basis, but instead allowed the terms of a rescue plan to be dictated by a discredited Wall Street on its own self-serving terms. There still has been no admission of culpability by top executives in the big banks in fomenting this crisis via lax risk management and distorted incentives, much less a clear out of some of the worst management in the history of capitalism. It's a bit late to worry about the moral hazard of 'holding the hand of government' inherent in this strategy when you're neck deep in a moral swamp. The Geithner plan is subtle and complex in its details and the vested financial interests are powerful enough to ensure it works to some extent, but it is basically a bet that taxpayer subsidies will encourage private investors to bid enough for toxic derivative assets to close the gap between internal bank valuations and what potential investors are willing to pay.

Fine in principle, but it may prove not only largely unworkable in practical terms, but intellectually misconceived and politically unethical. The essence of the problem is that the US government for the last six months has poured hundreds of billions into effectively insolvent banks to prevent bondholders taking a loss on their appalling investment decisions. Those same bondholders like PIMCO and Blackrock (about $100bn exposure to bank bonds between them) rushed to announce that they would participate in the new scheme, and I'm sure they will, as the quid pro quo is not taking a haircut on their bank holdings. A few billion thrown into buying dubious derivative assets is a small price to pay for that insurance (particularly given the generous taxpayer supplied non-recourse leverage), even if much of it ends up written off. Stepping back, the fix assumes that lack of investor liquidity is the core issue when it's clearly one of solvency; just last week Alan Greenspan predicted that US banks would need another $750bn in capital, and many analysts say north of $1trn.

The key issue isn't investor appetite, but bank reluctance to face up to the true market value of their portfolios; less than 20% is currently marked to market, the rest at par or marked to model. Will they really sell into auctions that will explicitly confirm the inadequacy of their capital positions and undermine the credibility of their internal risk models? Even if they do, and we get extensive price discovery across distressed assets, the scale of this plan looks woefully inadequate and would need not only to function efficiently but be doubled in size to approach a stabilization of US bank balance sheets.All that and we would end up back at the status quo ante, with a bunch of 'too big to fail' money center banks like Citi stumbling from crisis to crisis. But is there a hidden agenda to this strategy?