James Surowiecki's argument that the structure -- and thus the incentives -- embedded in the Geithner plan are exactly analogous to the FDIC's guarantee of loans since the 1930s is definitely an interesting, ad even comforting, way of thinking about the Treasury plan, but I'm not sure I totally buy it.For one thing, the FDIC insurance is an explicit deal: Banks are covered in return for immense regulatory transparency and constraints. The risks they can take with our money are, or at least have been until recent years, sharply circumscribed. The hedge funds and investment entities likely to participate in this auction will not be subject to the same federal oversight or behavioral modification. The risks they can take with our money will not be unlimited in the sense that the FDIC will pre-assess the loans to decide leverage, but nor will a particularly strict regulatory regime precede the insurance. The second objection is that even if the rules were exactly similar it's not obvious the markets would behave analogously. The FDIC-insured banking market deals with lots of small loans within a fairly staid and settled business model. The asset auctions, by contrast, are a wholly new market opportunity relying on massive individual investments that carry tremendous potential upside amidst a moment of historic uncertainty. Not only is the structure of the market different, but it's subject to a lot more animal spirits right now, and we're not even sure which animals are represented. MEET THE NEW BANKS, SAME AS THE OLD BANKS?
James Surowiecki's argument that the structure -- and thus the incentives -- embedded in the Geithner plan are exactly analogous to the FDIC's guarantee of loans since the 1930s is definitely an interesting, ad even comforting, way of thinking about the Treasury plan, but I'm not sure I totally buy it.For one thing, the FDIC insurance is an explicit deal: Banks are covered in return for immense regulatory transparency and constraints. The risks they can take with our money are, or at least have been until recent years, sharply circumscribed. The hedge funds and investment entities likely to participate in this auction will not be subject to the same federal oversight or behavioral modification. The risks they can take with our money will not be unlimited in the sense that the FDIC will pre-assess the loans to decide leverage, but nor will a particularly strict regulatory regime precede the insurance. The second objection is that even if the rules were exactly similar it's not obvious the markets would behave analogously. The FDIC-insured banking market deals with lots of small loans within a fairly staid and settled business model. The asset auctions, by contrast, are a wholly new market opportunity relying on massive individual investments that carry tremendous potential upside amidst a moment of historic uncertainty. Not only is the structure of the market different, but it's subject to a lot more animal spirits right now, and we're not even sure which animals are represented. 
