"There is something called the leverage cycle," said John Geanakoplis, an economics professor at Yale. During the bubble, he continued, when the country was awash in debt, toxic assets rated AAA were leveraged at an outlandish 16-to-1 ratio. That leverage was the primary reason those assets made such big returns. Now we're in the opposite end of the cycle. There is no leverage at all available -- yet without it, the return on these assets would simply be too small to make them interesting enough for investors to purchase. The only entity capable of injecting leverage in the system is the government.

Having spent the better part of this week mucking around in the details of the new plan,

A new defintion for side by side effort that sounds like terrific sex and YOU THE INVESTOR only need to lay there:

The plan would create incentives for private investors to put up small amounts of equity, side by side with the government, to buy toxic assets from the banks' balance sheets. To sweeten the deal, the government will also be putting in debt, at leverage ratios that could reach as high as six to one -- and will provide guarantees against most of the potential losses.

It's hard to say who is going to be effed though when people stop getting effed first and get sick of this and quit paying those mortgages on those upside down houses.

Oh and this one just fries me blackened with cajun spices:

Still, to get investors to buy those assets -- and get a market flowing again -- they still need some leverage to bolster potential returns. Critics complain that the government-provided debt amounts to a bribe to get investors to purchase the assets at inflated prices. But I don't think that's what's really going on. Instead, it appears that the government is trying to return some normalcy to the workings of the market.

Reading between the lines, my guess is that large banks and their regulators are at an impasse.  The large banks are saying that they are well-capitalized (as long as the toxic assets are valued at the higher hold-to-maturity level).  The regulators and everyone else are highly dubious.  While the regulators have a lot of power over the banks, the exercise of the big club- shutting them down and putting them into receivership - is not without legal problems - witness the lawsuit by Wamu, Inc (the holding company of Washington Mutual) against the FDIC.

The Geithner Plan, if it works, would create a third party pricing mechanism for the toxic assets, even though it is not completely  neutral because of the government involvement.  I think that the way Geithner is hoping it will work is that the first few pools will sell, the market will feel comfortable with the pricing and the assets will be liquidated.  If it works that way, the government involvement will be at around $100 billion.  

If it works, Geithner is assuming that it will expose holes in the capital positions of some banks and at that time, the banks may need further government capitalization.  

One of the reports of the meeting between Obama and the bank CEO's was that he was doing some arm-twisting with them to get them to sell the assets under the Geithner Plan.

[...] could, in the best case, make our banks a little healthier and a little better able to extend credit.