The long awaited financial plan designed to aid and revive the country’s banking system was unveiled by Treasury Secretary Tim Geithner yesterday. Wall Street rallied on the news, sending the stock market up 7 percent for the day. Geithner is hoping to leverage about $100 billion in TARP money to create a public-private partnership that will buy (and create a market for) the so called “toxic assets” that are on the balance sheets of so many banks and financial institutions. From the Wall Street Journal:

The plan calls for the federal government to work with private investors to try to restart the market for the troubled mortgage loans and securities, which in turn officials hope improves the financial condition of banks that have received billions in capital injections from the government already. The federal government will pair as much as $100 billion with private capital to generate $500 billion in purchasing power to buy the assets, and Mr. Geithner told reporters the plan could reach $1 trillion in size over time.

“We have to complement this program with a range of approaches to help get these securities markets back to a point where they’re working again,” Mr. Geithner told reporters Monday morning.

The market that Geithner hopes to revive will be supported by taxpayer guarantees, with a sharing of any upside gain but with the taxpayers absorbing most of any potential losses. From the Wall Street Journal:

Of course the largest risk, as always, is to the taxpayers. Don’t be fooled because Treasury isn’t going to Capitol Hill for more cash. The Obama Administration is instead leveraging the balance sheets of the Federal Reserve and Federal Deposit Insurance Corp., which will lend to the new public-private entities to buy the toxic assets.

In the case of the FDIC, it will lend at a debt-to-equity ratio of 6-to-l to the buyers. This means, according to the Treasury example, that the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar. The feds and private investors would each put up six cents in capital. If the asset rises in value over time, the taxpayer and investors share the upside. If it falls further, then the taxpayers would absorb by far the biggest chunk of the losses. Better hope the recovery really is, as the White House says, just around the corner.

Geithner is putting it all on the line here. There are so many different potentials that it really does boggle the mind. Paul Krugman over at the Times has already said that he believes this plan will not work, and to my thinking he is as credible as anyone on this subject. I do not believe that the undelying asset values are anywhere near what they are being carried at, and on that basis this plan may be pushing off the inevitable reckoning. I hope that thought is wrong.