Tomorrow, Treasury Secretary Geithner is scheduled to unveil his proposals for dealing with the financial crises. I will be measuring the proposals against the solution outlined by Ian Walsh on Friday: How to Perform Triage on the Banks and Stop the Bleeding
Not only is the financial situation getting worse, but a lot of securities either really have no market (they're hardly ever sold) or the market price is actually below their probable long term value. If the government is going to take over banks, or insure the securities, or set up a bad bank, they need to know whether they're solvent and how risky the securities they hold are—how likely they are to go bad in the future. Once they know that, they know how much to pay, which banks to take over and which banks can be saved.
How to value securities to allow proper bank triage and surgery
This process probably isn't much like what Geithner's going to propose Monday, but it should be. It's based on three principles.
1. Find out How Deep the Hole Is
2. Perform Triage: Bury the dead, help the injured, let those only mildly wounded fend for themselves
3. Make sure the damage to the financial sector doesn't spread any further beyond the financial sector
We can only hope Geithner's plan will do all three of these things.