My impression is that the bailout allows (requires?) the government to buy the assets at face value, not fire sale prices. Banks can sell loans at fire sale without the help of the government, but then that turns unrealized losses into realized loses and doesn’t provide them enough cash to start resuming lending. But if the gubment buys at face value, voila, the banks’ losses magically vanish and they get a big infusion of cash. I could be misinterpreting the bailout, but I think that is the whole social injustice of it, that banks that really do deserve losses for their poor management are shifting their losses to the tax payer. If my interpretation is correct, that makes your point even that much stronger. Yes, the government will have to take big write downs, but even bigger since the write downs will be from face instead of discount. It really, really won’t work.
