Henry Blodget | Feb 2, 09 9:34 AM

How will Treasury Secretary Tim Geithner secretly hose you as he bails out Wall Street executives, shareholders, and debtholders in his new banking-system fix?

He'll use your money to buy crap assets from banks for more than they are worth, thus secretly recapitalizing the banks at your expense.

The New York Times explains:

[T]he wild variations on the value of many bad bank assets can be seen by looking at one mortgage-backed bond recently analyzed by a division of Standard & Poor’s, the credit rating agency.

The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

Allow us to clarify:

The same crap asset that the government will buy on your behalf has four different values:

• The carrying value: $0.97. The dreamy hallucination that the bank that is stuck with the assets is telling its shareholders it is worth. The fact that there is almost no scenario that would lead to the crap asset actually being worth this much is why no one trusts banks anymore.

• A third-party assessment of value: $0.87. S&P's sharp analysts, the ones who almost certainly rated this security AAA when it was first dumped on unsuspecting buyers, say it is worth more than 10% less than the bank says it is worth.
  

• A conservative third-party assessment of value: $0.53. What S&P estimates the crap asset is worth if the economy doesn't immediately rebound, which is about half of what the bank says it is worth.

• The market's objective assessment of value: $0.38. Unlike the bank and S&P, markets have no incentive to misrepresent the true value of an asset (or to look at it through rose-colored glasses). And the market says the asset is worth about a third of what the bank says it is worth.

So what price will the goverment's "Bad Bank" pay for that crap asset on your behalf? The details have yet to be announced, but the signs aren't encouraging.

Sheila Bair has already suggested that the government knows better than the market does what these assets are worth. Translation? We're going to overpay for the crap assets and secretly recapitalize the banks at taxpayer expense