To me, this passage states the key problem with the plan (italics mine):

[A]s markets have lost confidence in mortgage-backed securities, their prices have dropped sharply. Yet the value of many of these assets will likely be higher than their current price, because the vast majority of Americans will ultimately pay off their mortgages. The government is the one institution with the patience and resources to buy these assets at their current low prices and hold them until markets return to normal. And when that happens, money will flow back to the Treasury as these assets are sold. And we expect that much, if not all, of the tax dollars we invest will be paid back.

ME: Who knows what the current price of these assets is? Is the government going to set the price? Is it going to take the word of the troubled holders of this bad paper about what the paper is worth?

Any plan has to have a rational means of establishing the objective value of these securities. If they are only worth, say, 25 cents on the dollar but the government pays 50, that is an utter disaster for the taxpayers — and a windfall that rewards and encourages the bad behavior that got us in this mess in the first place. It seems to me that the key question is one the president simply didn’t address last night: If we put up this money, how do we know the true value of what we are buying?

Wouldn’t it be better to make this taxpayer money available for loan, let the institutions buy them at whatever price the market will bear, and take back collateral as was done with AIG? I realize this will mean companies holding truly worthless paper will fail, but shouldn’t they fail anyway? And won’t they eventually fail anyway (i.e., wouldn’t propping them up just postpone the inevitable)?