The problem with the so-called toxic assets is not the gap between bank valuations for those assets and their market price. The problem is the toxicity itself. They lost value, in some sense are actually worthless, because of that toxicity. That is not a function of investor confidence, but rather of their organic composition and design. That cancer will not go away simply by artificially inflating their market price through subsidization. That just means that we eat the cancerous bits, instead of banks having to cut them out and eat the losses.
Theassets must be unwound, the toxicity surgically removed, and the clean, new, transparent security re-rated and re-sold, if possible. BlackRock has apparently devised a software program to facilitate this process. Geithner has already engaged them, with the promise of huge government fees, in his effort to entice investors and jumstart the credit derivatives market. This activity is being done secretively because it exposes that the problem is not one of confidence, but rather one of systemic design and behavior. Credit derivatives will result in cancer if traded over the counter with no oversight or controls. The incentive to deceive is too great.
Now, I say re-rated and re-sold, if possible, because the economy is in crisis. No one can predict how long or how deep this global recession will be. The assets became toxic because they were derived from bundles of assets that are not performing. The uncertainty of that performance remains and, in some regards, is deepening. Hence, the elevated risk, and the crash in price. Until and unless there is systemic reform, only a fool would invest in those derivatives with an eye towards anything other than a quick buck. I see no indication that Geithner and Obama have any intention to implement systemic reform.
They are simply trying desperately to pull a snow-job on everyone and shove the problem down the road. It's quite despicable and beneath contempt.

First, a memo to John Paulson:
As we go forward, learn English and try not to lie so much. "There hasn’t been one problem at all to global systemic risk in the U.S. or abroad from a hedge fund." No, hedge funds have not been problematic TO global systemic risk, they have CAUSED the risk. LTCM was what, a church fund? It was the collapse of the hedge fund factories at every major financial institution that caused this crisis. AIG was an insurance company with an enormous hedge fund tumor on its head..
Now, of all the reasons why Timothy Geithner and Larry Summers were disastrous choices to lead us out of this crisis, having them in charge of regulatory reform is the most salient. THE PEOPLE WHO HELPED CREATE THE PROBLEM CANNOT BE TRUSTED TO FORMULATE AND IMPLEMENT EFFECTIVE REGULATIONS ON THEIR FORMER FRIENDS AND BUSINESS PARTNERS. It flies in the face of all common sense. It smells of rank corruption. It tells the American people that the administration thinks we are idiots. Summers was a hedge fund manager, for crying out loud. Why not have Bernie Madoff write the regulations? He certainly knows a thing or two about how to avoid them?
Geithner and Summers were two of the loudest voices over the past 10 years AGAINST regulation of hedge funds and derivatives activity. While head of the Federal Reserve Bank of New York, Geithner promoted the use of credit derivatives, praising them in a speech to the Credit Markets Symposium in 2007 for offering "a relaxation of financial constraints," "increased flexibility," helping to "free up funding and capital." He argued that these deceptive instruments would "make markets both more effective and more resilient" and "better able to absorb stress."
According to the Bank for International Settlements, since 1998, the OTC derivatives market has grown 10-fold, to over $600 trillion in notional contracts. Credit derivatives alone grew over 400% from Dec. 2005 to Dec. 2007. The problem is not just one of a lack of transparency, but also of sheer size. It is literally impossible to expect a single systemic risk regulator to oversee such a gargantuan amount of activity. Geithner made the point himself, while arguing against regulation in 2007: "We cannot turn back the clock on innovation or reverse the increase in complexity around risk management. We do not have the capacity to monitor or control concentrations of leverage or risk outside the banking system(hedge funds). We cannot identify the likely sources of future stress to the system." He believes regulation is actually IMPOSSIBLE. In an earlier speech, he called transparency of hedge fund activity "un-achievable," saying "No one with access to that information could make sensible judgements..." Yet THAT, is precisely what Geithner is proposing. They are not going to break up the big, insolvent banks, or reinstate Glass-Steagall, with its systemically protective barriers between speculative gambling and mom and pop banking. No, no, that would be, I don’t know, SMART. No, they will appoint some guy to keep his eye on things. Where will they find him? Wall Street, of course. See, they think we are idiots.
If Brooksley Borne, Frank Partnoy, Satyajit Das, James Galbraith or Joseph Stiglitz were devising the regulations I would feel far more confident. Forgive my cynicism, but when the devil writes the contracts, he makes a home for himself in the details.
Glass-Steagall must be reinstated. Bankruptcy laws must be amended. SECURITIZATION OF CONSUMER AND HOUSEHOLD DEBT MUST BE DISINCENTIVIZED, not subsidized. Hedge funds must be regulated within an inch of their lives. Derivatives instruments must be strictly limited with painful penalties for excessive, exotic and deceptively risky innovations.
The sad irony of this is that unquestionably necessary and strict regulations will hopefully suppress the market for the toxic garbage Paulson and Geithner have bought or guaranteed with taxpayer money, thereby ensuring greater losses for taxpayers. That is precisely why regulatory reform should have been concurrent with or, better yet, PRECEEDED bailouts.

What we now know

First, the righteous glee with which Barney Frank, Chris Dodd, Chuck Schumer, Larry Summers and even our president took to the microphones to denounce AIG for handing out contractually obligated bonuses, blame Republicans for not placing restrictions on bailout money, and toughly promise to get that money back by hook or by crook was sweaty and a bit disgusting. I don't like Democrats standing on principle when it's cheap and using the politics of fear when it's not. None of them will talk about undoing Gramm-Leach-Bliley, or amending the bankruptcy laws so an automatic stay applies to derivatives contracts. That would require testicular fortitude, in very short supply on the left side of the aisle. By avoiding nationalization of AIG, this administration and THIS majority party are forcing American taxpayers to continue bailing out foreign banks, sovereign wealth funds and american financial institutions that are now double-dipping in the public trough.
So, here's what we now know:
High on the list of AIG's CDS counterparties are Goldman-Sachs, Citi, B of A, Merrill, Morgan Stanley, Wachovia and, oh look, Citadel. Nice to see they made it on the list.
Starting in late 2004 or early 2005, they all became terrified that the housing bubble, propping up the assets contained in the securities bundles out of which the exotic bond instruments they invented and gorged themselves on, would certainly collapse, and that some form of insurance was essential. They all suddenly gorged themselves on AIG CDS products to massively hedge the risk of their CDO portfolios. In 2004, the CDS market was insignificantly small, relative to other derivatives markets. The 2005 bankruptcy bill explicitly named CDS contracts as exempt from automatic stays in bankruptcy proceedings. The game was on, the risk-free hedge was now possible. By mid-2008, OTC CDS had exponentially exploded to over $60 trillion in notional contracts.
What AIG just confirmed is that all these major financial institutions knew, as far back as 2005, that they had created a house of cards destined to collapse.