Why the markets hate the bailout.

Why? Consider five bad-bank ideas that bailout supporters hope to sell but that the markets just aren't buying:

1. Banks will be falling all over themselves to sell their toxic sludge to the bad bank. Don't count on this. There is no bank that is happy to be carrying on its books the miserable evidence of the last few years' misdeeds. Sure they want to get rid of the loans. But they don't want to sell these loans at fire-sale prices. For one thing, they will continue to hope that the economy will turn around, defaults will fall, individuals and businesses that borrowed from them will start making their payments or refinance, and the loans will be worth more tomorrow than they seem to be today. For another, the last thing that they want to do is sell the loans today at their real market value because the moment they do that, they will have to pull out their calculators and put in the new values, and it is likely to turn out that when the math is done (as Daniel Gross has pointed out) they will be insolvent. Yes, banks want to sell these loans. They just want to sell them for more than they are worth.

2. Private equity investors will line up to buy the assets from the government. Some of the smartest people in finance, including John Paulson, who made billions betting against the banks as the crisis was just starting to unfold, have indicated that they are probing the waters and looking to buy mortgages and derivatives that may still have some value. Problem is, they have no interest in buying them at anything other than bargain-bin prices. If they did, they would be scooping them up already. One of the implicit hopes of the bailout plan is that the government can bail out the banks and that private investors can then bail out the government. This won't happen. One major investor tartly and memorably told the Wall Street Journal that if the government was looking for a partner to share its losses, firms like his weren't interested.

3. The bad bank is like the Resolution Trust Corp. of the 1990s. In retrospect, the RTC looks like a model government bailout, if there is such a thing as a model bailout. It picked up the assets of failed savings and loans and over a number of years managed to recoup a substantial part of the government's cost. But. The key word here is failed. The bad bank that folks are talking about now sounds a lot like the RTC, but the difference (as others, including Krugman, have pointed out) is that the RTC got all the assets of insolvent banks. The bad bank would get just the toxic assets of banks that stay in business. It's the difference between having the government take over all the houses on a blighted street and having it take over just the ones that have burned down.

4. The U.S. government might make money on the toxic assets it takes over. If you've read this far, you saw this one coming. There've been a number of national bank rescues before, in countries ranging from Jamaica to Japan to South Korea. In all these cases, banks pumped money into the banks in return for equity. Portfolio's Zubin Jelveh has dug up some great numbers on the results, and no government has made money in the process. This isn't exactly the plan being considered now, but it gives you a sense of the basic problem: Bad assets aren't just "undervalued" because no one wants to buy them right now. No matter how you cut it, filling the hole in the bank balance sheet costs money. Whatever the government does to recoup its investment—selling bad assets to private equity investors or taking shares in banks—it will get less than it puts in.

5. The Timothy Geithner-Barack Obama bank rescue plan is very different from the Hank Paulson-George Bush plan. Hank Paulson's initial plan was to use the money to take bad assets off the banks' hands. This was widely criticized as a giveaway to financial companies (notably by star economist Nouriel Roubini) that would result in the government paying too much for bad assets and still failing to jump-start the credit markets quickly. So the government went with an alternate plan of pumping capital into the banking system as quickly as possible with an emergency package of low-rate loans. It's become clear that approach has not worked yet and will not work as fast as was hoped. The new plan is a bigger version of the same thing. This, in the end, might be the most disappointing thing about the bailout plan. Folks on all sides have spent months hoping for a new and better idea for what to do about the banking crisis. So far, we don't have one.