Treasury Secretary Geithner presented a more detailed plan for the government to help banks get rid of toxic assets and improve the lending climate among financial institutions and businesses. The Dow Jones average rose 500 points. The New York Times reported that his plan “dazzled” Wall St. 

 All the details are can be seen at http://financialstability.gov/ . The plan leverages about $100 billion in TARP funds to purchase about $500 billion in assets (to be expanded to about $1 trillion over time) to create a legacy loans program and a legacy securities program. Below is a functional diagram (click on it to see a larger view).

As described in the Treasury Overview the two key elements are:

• Legacy Loans Program: a program to combine an FDIC guarantee of debt financing with equity capital from the private sector and the Treasury to support the purchase of troubled loans from insured depository institutions.
• Legacy Securities Program: a program to combine financing from the Federal Reserve and Treasury through the Term Asset-Backed Securities Loan Facility (“TALF”) with equity capital from the private sector and the Treasury to address the problem of troubled securities.

In legacy loans, private investors bid at auction for the right to purchase pools of mortgages. If selected, they put up half the equity portion and form a Public-Private Equity Fund (PPIF) with the government, which provides TARP funds for the other half) and borrow up to a 6:1 debt to equity ratio (as determined beforehand by FDIC) to finance the remainder.

In legacy securities, the Federal Reserve makes loans to private investors from its Term Asset Backed Securities Loan Facility (TALF) with equity capital split evenly between the government TARP funds and investors in the purchase of non-agency (not issued by Fannie or Freddie) residential and commercial mortgage backed securities (RMBS and CMBS).

In addition, the legacy securities program provides that Treasury will partner with selected Fund Managers, who after raising private capital, can receive matching TARP funds from Treasury leveraged with loans from TALF to purchase non agency AAA rated RMBS and CMBS.

Though markets cheered loudly, there has been a spirited debate among economists, including this in the NY Times between four relatively liberal economists (Brad Delong, Paul Krugman, Mark Thoma, and Simon Johnson), who represented the approval spectrum from like to dislike. Each makes a statement and then responds to a position of one of the others - interesting. Criticism centers around whether investors will see an incentive to participate and how long the plan can be attempted before stronger measures, like some form of nationalization, must be attempted.

For a more conservative assessment, see this critique on a broader scale by George Will in the Washington Post.

Update (3/25): James Kwak at Baselinescenario.com posted an update earlier today that further expands on the discussion of the viability of this plan.