Geithner's programme does pose large risks to taxpayers

From Prof Jeffrey D. Sachs.

Sir, William Cline (Letters, April 8) acknowledges my point that the Geithner plan will lead to over-payment for toxic assets at the taxpayer's expense, but he greatly underestimates the hidden cost of the programme.

He bases his calculations on a 68 per cent probability of full repayment on the toxic loans and a 32 per cent probability of half repayment. This implies an overall 84 per cent expected repayment rate on the toxic loans, despite the fact that market investors are widely reported to be offering only 20 to 40 per cent of face value for toxic loans, and despite the fact that the banks themselves will be able to choose which toxic loans to put up for auction under the Geithner plan.

If the problems were as mild as assumed by Dr Cline we would not have the massive crisis we do and the International Monetary Fund would not be projecting nearly $3,000bn in US credit losses. The other points he raises (that Federal Deposit Insurance Corp leverage will be capped at six to one and that private investors will require expected net profits on their equity) don't change my conclusion that the Geithner plan poses large risks to taxpayers.

Jeffrey D. Sachs,

The Earth Institute at Columbia University,

New York, NY, US