The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said. - Stiglitz
I think this is overblown. The taxpayer's have a fancy equity stake, so they have upside, too. [Of course, they could have just taken old-fashioned equity stakes, which would have broadened the taxpayer claim on assets, but ...]
What's more, if the FDIC fees are meaningful, the taxpayer's total investment is less than what will be put up by private investors, who will pay those fees. Therefore, if there is an upturn, the taxpayers will get a better return on total investment than private investors. It is true, they will have larger losses, but that is the price of the plan.
First pass, it seems that the key assumption of the Geithner plan is that it is large enough to work, that the bad-asset problem, future and current, is manageable, using this form of redress, even if economic assumptions all turn out the worst.
It could be that assumption is wrong. If the severity of the situation is large enough, then private-public wealth transfers will be required, and perhaps even some private-private transfers (like bankruptcy/re-organization or pre-packaged bankruptcy).
The good news is that good news is self-reinforcing, so, if the plan gets off to a good start, it could build *some* of its own momentum.
