The logic of the new Geithner plan is that CDO’s can be bought for less than their hold to maturity value because of panic and the fact that most huge players have cash flow problems.
Thus the logic is that a calm investor whose mood does not swing with the mood of the average investor who is also willing to buy and hold to maturity would be eager to invest in CDO’s.
Such a hypothetical patient contrarian investor is not hypothetical. He is named Warren Buffet. As far as I know Warren Buffet is not buying CDOs. The Obama administrations position is that they can play the game of contrarianism and patience better than Warren Buffet.
I don’t think that Obama or Geithner believes this. I think they are eager to give money to the banks and want to buy CDOs at above their expected hold to maturity value. I think this would be is better than letting banks fail, but worse than temporarily nationalizing them.