What you might find in Tim Geithner’s bad bank

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On Time.com, our colleague Steve Gandel writes:

A financial milestone was achieved on October 27, 2004 with the birth of Strata 2004-8. If you haven’t made arrangements for the five-year anniversary this fall, don’t worry. Few people will be celebrating.

Strata is one of the many so-called toxic assets clogging the nation’s financial pathways. What’s more, the complicated bond and its ilk are likely to present a significant stumbling block in the government’s latest effort to fix our ailing banks.

On Tuesday, Treasury Secretary Timothy Geithner is expected to announce the administration’s plans for the second half of the $700 billion bank bailout approved by Congress last fall. The centerpiece is likely to be a government-backed aggregator bank (the much-discussed “bad bank”), which will provide financing and loss protection for investors willing to buy the troubled assets sitting on bank balance sheets. Those delinquent loans, or the bonds tied to them, are dragging down the financial firms’ value, putting some dangerously close to insolvency.

But for the plan to work, private investors and the government will have to agree what these loans are worth. “Many of the institutions that bought these deals didn’t understand them fully,” says Barry Silbert, chief executive of SecondMarket, which helps investors buy and sell hard to trade assets. “It is going to be very hard for the government to come in and try to pack up these opaque assets and ship them off to investors.”

Steve then very bravely explores the inner guts of Strata 2004-8. It is not pretty. But quite well-written.