ANALYSIS:Initiative's appeal to investors should come as no surprise, writes DENIS STAUNTONin Washington

WHEN US treasury secretary Timothy Geithner unveiled his keenly anticipated plan to deal with banks’ toxic assets yesterday, he did so not in a televised press conference but in a “pen and pad” briefing behind closed doors.

Mr Geithner’s reticence was rooted in bitter experience; the last time he made a major televised announcement, his performance was so vague and halting that he sent shares on Wall Street into a nosedive.

Yesterday, the treasury secretary triggered a global stock market rally with his plan, which will create a public-private investment programme to buy up toxic loans and mortgage-backed securities the banks cannot sell.

The White House was pleased with the initial response from investors, declaring that a number of private funds were not only interested but enthusiastic about getting on board.

“A broad array of investors are expected to participate in the Legacy Loans Program,” the treasury department said in a fact sheet on the scheme. “The participation of individual investors, pension plans, insurance companies and other long-term investors is particularly encouraged.”

The private sector’s interest should be no surprise because Mr Geithner’s plan represents a very good deal for private investors.

Under the scheme, if an investor wants to buy a troubled asset for $100 (€73), he must only put up $7. The federal government will match his $7 and the other $86 will come in the form of a low-interest, government-guaranteed loan.

If the asset appreciates over time, the private investor will reap 93 per cent of the gain, with the government profiting only on the basis of its $7 investment. If the asset loses value, however, the private investor cannot lose more than his initial $7 stake, leaving the government to bear an overwhelming share of the risk.

Mr Geithner insisted that the government needs private sector involvement so that competition will drive down the price of the toxic assets. Under the plan, the government will only partner with investment funds that secure the assets for the lowest possible price.

Sceptics fear that the plan will fail because the banks will be unwilling to sell the assets at heavily discounted prices.

A government purchase of banks’ toxic assets was first proposed by Hank Paulson, Mr Geithner’s predecessor as treasury secretary. Mr Paulson changed his mind about the idea, investing bailout funds instead in equity stakes in the banks in an effort to shore up their balance sheets.

Almost everyone agrees that the frozen assets are a major reason why banks are reluctant to lend to one another. What is less clear is whether Mr Geithner’s plan will work.

Nobel economics laureate Paul Krugman predicted that the scheme would fail, arguing in the New York Times that it is based on the false premise that the toxic assets are undervalued.

“The idea, says Mr Obama’s top economic adviser, is to use ‘the expertise of the market’ to set the value of toxic assets. But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away . . . this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidise purchases of bad assets,” he wrote.