Yesterday, I wrote that Timothy Geithner’s plan to buy toxic assets was “starting to look good to investors,” and that is true. However, that does not mean the Public-Private Investment Program looks good to taxpayers.

The central argument in favor of the Geithner plan centers on price discovery (see Donald Marron’s comments in this video). The price discovery is meant to spur greater investment and therefore a kind of thawing of the capital markets.

But as Chris Whalen of the Institutional Risk Analyst points out, this plan offers nothing close to real, market-based price discovery. In fact, why not look at none other than the Federal Deposit Insurance Corp. for true price discovery.

As most of our readers know, the FDIC is selling troubled assets all the time. In the first two months of this year, the FDIC sold more than $711 million of such assets. By our calculation, the FDIC received $0.48 for each $1 of face value of loans. This is actually an improvement on the $0.38 average price the FDIC got during the same period in 2008. The reason for the improvement is that some of the loans the FDIC has sold in 2009 were fully performing. The government actually has received par for six of the 103 pools it sold.

It should be noted that prices are dropping for FDIC loan portfolio sales. In January, the FDIC got an average price of $0.51 on the $1. Last month that dropped to $0.44.

Rather than allow pricing to hit its equilibrium, Geithner is subsidizing asset sales and reintroducing leverage to the mix. Sure, that’s good for investors, but what about the rest of us?

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