Alas!, the details of the long awaited Public-Private Partnership Investment Program aka “Geithner bank bailout plan” were released today by the Treasury. Compared with the debacle a couple weeks back when Geithner first introduced the plan, but failed to provide any concrete details, the markets responded very well to this latest announcement with the major averages trading to their highest levels in more than a month. The Dow closed up almost 500 points!

The plan targets two types of impaired assets sitting on bank balance sheets: Legacy Loans and Legacy Securities. Through the use of FDIC debt guarantees, TARP money, and the Fed’s TALF program, the government intends to provide financing to private investors wishing to purchase these impaired assets from the banks. By allowing private investors to make use of leverage, the plan is likely to create higher prices for the assets. Assets would be sold to the highest bidder with the government and the private investor taking equal equity stakes and sharing in the returns.

The public-private partnership solves two pressing issues. First, it sets a “market price” for the assets through the auction mechanism. Second, as opposed to an RTC like entity, the taxpayer is not responsible for all the potential losses from the asset purchase.

In my mind, the plan faces two major hurdles. One is the willingness of Congress to go along with it. As we witnessed last week, Congress seems unwilling to support any actions where it feels taxpayers are bearing an undue share of the risk when compared with the potential upside. In this plan, the taxpayer only has 50% of the upside, but through FDIC debt guarantees, TARP funds, and the TALF, the taxpayer could be on the hook for a disproportionate share of the potential losses.

The second hurdle is the question of whether the banks will actually sell these impaired assets at the “market price”. Presumably investors will try to bid as low as possible to guarantee attractive returns, whereas many banks have not been very aggressive in writing down the value of these legacy assets. Selling the assets would lead to large realized losses and many banks may choose to hold onto the assets and sell them at higher prices in a few years. No one wants to be selling these assets at fire-sale prices if they can avoid it.

Regardless of the potential hurdles, the plan is unquestionably a good sign for the markets. The problem facing our banks is that there was no market for these toxic assets, and this plan creates one. Already some of this country’s largest bond managers Pimco and Blackrock have indicated their willingness to participate in the program. If everything moves forward smoothly, the auctions are likely to start in a couple of weeks. This is another important step on the road to economic recovery.

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