I used to believe that massive government fraud and corruption was something that took place behind the scenes. If anyone tried it in the light of day, they’d be summarily fired, publically vilified, and probably indicted. But Tim Geithner’s plan to remove toxic assets from the banking system is making it all respectable.

What would we think, for example, if we discovered that the Bush Administration had been secretly lending hundreds of billions of taxpayer dollars to their friends to participate in a highly speculative investment scheme? Some of the friends turned out to be former colleagues and mentors at private equity and sovereign wealth funds, and most of the money came from subsidized interest rates on non-recourse loans from the FDIC, so that if the investments went bad, the private investors could walk away with only minor losses while leaving the Treasury stuck with the bad investments? But if the investments became profitable, the private investors would have leveraged massive US dollars and become obscenely rich.

I’d still like to think if we discovered this had been going on, Congress and the public would demand the resignations of every responsible official. There would have been calls for criminal investigations of the extent of corruption and collusion in the scheme to loot US taxpayers.

How naive I once was. The Obama Administration’s position is that if you set up this speculative looting scheme to occur in broad daylight, and claim it will unclog bank lending, it’s okay. And private investors who take advantage of the looting scheme should be regarded as "the good guys," as Christina Romer suggested yesterday, while the officials who concocted this scheme must be retained no matter what the public outrage.

Has the Obama Administration really sunk to this? What possible excuses do they have?

1. The program would remove $500 billion to $1 trillion in toxic assets from the bank’s balance sheets, supposedly "unclogging" the credit system? Okay, but so would just buying the assets outright without the private partnership subterfuge and subsidies to private investors.

2. The private participation allows them to bid to create a market. Cut the crap. Bidding may create a "market" but subsidized, risk-shielding bids do not create efficient prices.

3. The private participant bids improve the prices. More crap. Subsidized bids (or shifting risks of losses) may serve to increase bid prices (probably a goal here), but what is the public interest in that? And even if the point is to pay more for the assets to help reach the banks’ reserve prices, then just pay it. It’s a bad idea, and we don’t need sweetheart private deals to achieve it.

4. The partnerships will help leverage private investment dollars to help purchase the assets. Yes, and do so very inefficiently, by unjustly enriching the private investors, whose contribution is trivial.

5. The partnership avoids the problem in the original Paulson proposal of not knowing how much to pay for assets. How? If there are auctions, the banks will set reserve prices below which they will not sell. Either the auctions fail to meet those prices, or the subsidies will increase to close the gap been offers and bids. The incentives/subsidies will drive the prices and we still won’t know what the "correct" price should have been.

6. We need private equity participation because it has expertise in evaluating banks assets. More gibberish. The first thing we need is due diligence by our government. Go through the assets (or a set of them), check their histories and find out what’s in them. If you need more experts, hire them without the scam.