Separating Toxic Assets from Legacy Assets

Treasury's asset-purchase program may identify the good banks — and doom the crippled ones

Illustration by Harry Campbell for Time

When treasury secretary Tim Geithner rolled out his long-awaited plan for buying up toxic mortgage loans and securities on March 23, reaction was split. Financial markets cheered, with the Dow Jones industrial average rocketing 497 points, or 6.8%, on the day. The chattering classes mostly grumbled, with Princeton economist and New York Times columnist Paul Krugman gloomily leading the way: "It fills me with a sense of despair," he wrote of the plan before it was released but after many details had leaked out.

One simple explanation for this divide is that the Geithner plan — which...

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