A bad-asset bailout that only private equity could love.

One of the oddest quotes coming from a government official in the lead-up to today's new toxic-asset plan was this one from White House economist Cristina Romer: "What we're talking about now are private firms that are kind of doing us a favor, coming into this market to help us buy these toxic assets off banks' balance sheets." The italics are mine, but, even without them, the idea that private-equity managers will do the government a favor jumps out at you as clearly as if it were outlined in bright lights.

In fact, you can rest assured that no favors will be done. As one fund manager tartly and memorably told the Wall Street Journal a while ago, if the government was looking for private partners to share in its bailout losses, firms like his weren't interested. Now, of course, private investors (such as, for instance, mega-buyout firm BlackRock) are very interested in the bailout plan. That's because we have a plan in which the bulk of any profits go the investors, and the losses go to the public tab.

One of the discussions that has been with us through the months of the developing bailout is whether the government would have to overpay for the toxic assets it takes off of banks' hands. They are worth something, but no one knows how much. Having private investors bid on the assets seems to ensure we'll set a fair price—the investors don't have any incentive to give away their money.

That's the theory, anyway. In fact, there are other ways to avoid overpaying the banks. One way is simply for the government to take over failing banks and unravel the mess itself—that's what Sweden did when that country's banks were similarly insolvent. That doesn't seem to be a politically viable option. Another is for the government to put up capital and have banks bid on how little they would take for them. But that would require billions more in rescue funds.

The current plan gets the government off the hook right now. Instead of putting up cash, it offers loan guarantees to private partners. What will this mean? With investors' losses covered, the greatest likelihood is that the government's new private partners will underpay for some assets and overpay for others. That's OK for them; they make money on each trade that works, and the government, thanks to guaranteed loans, takes the losses on any trade that doesn't. Wall Street might not have done a great job of this in the last few years, but it has thousands of people whose job is to put together portfolios of assets that make this kind of deal work to their advantage.

Supporters of the bailout plan think that the government's risk here is fairly small. Economists Brad DeLong and Paul Krugman have been engaged in an interesting debate about just how big the risks are. The optimists say the government is unlikely to have to make good on its loan guarantees. The pessimists, like Krugman (and others such as Portfolio.com's Felix Salmon, who calls the plan doomed from the start), think it will: They believe the bad assets are so hard to sell now not just because everyone is scared of buying them but because many of the bonds and derivatives that banks are holding really are close to worthless.