Annie Lowrey writes:

Finally, in a macro sense, the Geithner plan is set up precisely to recapitalize the banks, create a market for the bad assets, and to get the assets off the banks’ books. Gaming the system does recapitalize the banks. It does bolster the market for the bad assets. And it does sequester the assets in spin-off companies — a kind of good-bank/bad-bank scenario.

In short: the Geithner plan might not be fair. It, in some sense, props up and rewards companies that took massive risks and now need taxpayers and the government to bail them out. But, taking the Geithner plan as it is, gaming doesn’t seem so bad.

Ezra asks what folks think of this. I think that allowing banks to game the system is one way to recapitalize them, albeit at a high political cost — there’s no good way to spin Citigroup setting up quasi-hedge funds with government money in order to bid up the price of its assets and sell them to…itself. But maybe that’s what the government is after.

I think that the goals of recapitalization and creating a market for bad assets are largely mutually exclusive, at least in auctions driven by gaming. Auctions in which banks are gaming the system and bidding up the prices of the assets being sold are not auctions that will attract disinterested money, and will impair whatever other functions the plan was supposed to serve — market price or reservation price discovery. Gaming might generate some good effects for the banking system, but at the expense of the other goals of the plan.