The essence of the plan involves using both government and private funds to help segregate the huge pile of bad mortgage debt from the rest of the banking system by buying it, presumably at a discount. A step that most financial experts agree is needed to restore the health of the system. If private money is to be enticed into buying this bad debt, then that discount is likely to be steep. It was not clear whether the government funds would be used to subsidize a portion of the purchases for the private buyers, or whether the government would become partial owner of the debt. Geithner also promised $50 billion in federal funds to help reduce home foreclosures, keeping people in their homes where possible, and keeping the mortgages for those homes from moving into the default column.

Geithner could not say for certain whether the remaining $350 billion of the already approved $700 billion bailout package would be enough to get the job done. He indicated that much would depend on how quickly market confidence could be restored. No sooner had he uttered those words, however, than the market dropped, with the Dow closing down more than 4.5% on the day. That represents the biggest one day drop since Obama took office.

Another of the plan's provisions calls for what Geithner termed a "stress test" of financial institutions to see if they really need government assistance. This would lay bare the true state of their balance sheets and the level of risk to which the bonus collecting CEOs of Wall Street allowed their companies to be exposed. The common expectation is that, so far, banks have been shielding visibility to the true depth of their problems and that laying all the cards on the table will show the system to be much weaker than has been admitted to date. That, of course, would have a strongly negative effect on market and consumer confidence and might even exacerbate the problem. On the other hand, continuing to sweep the dirt under the rug is not going to clean up the situation either.

All in all, Geithner's framework looks good. It isn't the silver bullet that will make the problem disappear in week or month, as some investors would like, but the window of opportunity for that passed about two years ago. In most market crashes or severe downturns, experienced investors look for a signal called capitulation. Capitulation occurs when the average investor essentially gives up on the market and pulls out their money. This generally makes for a sudden, severe, and painful drop after a protracted downturn. However, it often signals a return to stability or upward movement. Geithner's stress test may provide a capitulation of sorts for the banking industry. Instead of hiding the magnitude of their problem, everything will be out in the open and we can all stop waiting for the other shoe to fall.

Author: Brad Sylvester