Paul Krugman has a brief explanation as to why the non-recourse loans from the government are a subsidy to increase the asset price of the troubled assets.

Mish goes as far as to call the whole thing a giant con.

Naked Capitalism has three pieces discussing the problems with the plan here, here, and here.

Calculated Risk has the links for the details. This post provides some arguments from plan supporters.

Here’s my simple illustration of why this plan might not work as intended: Imagine that two banks are the only ones to participate. Bank A has $100 billion in troubled assets and Bank B has $100 billion in troubled assets, both at face value. Bank B can buy Bank A’s assets for $100 billion at face value by putting up $3 billion. Our government puts up the rest. Bank A can turn around and do the same to Bank B’s assets. No real change has been made, right? They both have $100 billion in toxic assets. Oh, they also both have $97 billion in cash that they didn’t have before. The big difference now is that the most that Bank A can lose is $3 billion, while before they were risking $100 billion in losses. Our government takes the remaining $97 billion in losses (times two). Heck, the banks should bid above face value, and recover the whole face value. Ok, this scenario is very unlikely to play out (it requires collusion), but it should be clear that a non-recourse loan is a subsidy. The incentive to create highly leveraged, off balance sheet investment vehicles is quite high (and we know how that ends).

Bonus: HousingWire has a similarly negative view.

UPDATE

Apparently our government is only on the hook for 93% of the losses.