What now for crisis - relief or relapse?

So, do the Obama administration and its already embattled treasury secretary, Timothy Geithner, really have a plan to save America's banks, or is the nation just trying to cover its toxic assets for a few more months?

Wall Street yesterday held an instant referendum on the new $1 trillion plan for a public-private partnership to restore America's banks and gave it a huge vote of confidence as the Dow Jones average of 30 blue-chip stocks soared by a whopping 497 points, or 6.8 percent.

So does that mean the banking crisis is over, or are some naysayers right when they warn that the plan is inadequate? The Daily News tries to break it all down for you.

Q. I've had a hard time follow- ing this from the git-go. Just what the heck is a "toxic asset?"

A. Great question, especially since the phrase was essentially invented just last year. Generally, it refers to home loans - primarily those ballooning subprime mortgages with low teaser rates aggressively sold in booming markets or to low-income buyers. Banks bundled and sold these risky loans to other financial institutions in large packages - the so-called mortgage-backed securities.

But when home prices cratered about two years ago, thousands of these homes fell into foreclosure, and most are worth less than the amount of their mortgages. The banks that bought these mortgage-backed securities are left holding the bag, and they not only don't know what to do with these bundles of loans, they don't even know what they're worth.

Q. OK, why is that such a problem?

A. Well, the banks lost money on the bad loans, but it's even more complicated than that. Because they don't know how to value these so-called toxic assets, bankers can't get a handle on the amount of overall capital they have, and without knowing the bank's net worth, they're reluctant to lend new money. That is what caused the credit markets to seize up, and once banks stop making loans, business growth and job creation slow to a standstill.

Q. Why doesn't government, or somebody, do something?

A. That's been the idea since last fall, when Congress and the then-Bush administration passed the infamous $700 billion bailout package known as TARP, for Troubled Asset Relief Program. That was supposed to buy up these toxic loans, but there was a big problem: If the government had paid pennies on the dollar, as seemed likely, it would render many banks worthless, but too generous a price would leave American taxpayers holding the gigantic bag.

So the feds just pumped cash directly into the banks - with little oversight or transparency - and hoped they would start lending money again. Most didn't.

Q. So what is the new plan, and is it so different?

A. The $1 trillion package includes about $75 billion to $100 billion in leftover money from TARP, a matching amount from private investment companies and the rest from loans from agencies like the Federal Deposit Insurance Corp., or FDIC.

The private role is critical. Government officials believe that the risk taken by these investors will lead to a fair price for the toxic assets. For their part, the private firms will reap a profit if and when the American economy recovers and the assets regain some of their value.

Q. So who likes the Geithner plan?

A. Wall Street, clearly, as well as global markets that staged a huge rally yesterday, in part out of relief that there is now a plan, period. But even some economic experts who've been critical of the new Obama team did give a qualified thumbs-up.

Q. So what's the problem?

A. Some critics worry that the program still isn't big enough to tackle the problem - pegged by some experts at $2 trillion, maybe more - and that it's a desperate bid to protect bank shareholders and management while putting off the day of reckoning.

Paul Krugman, the Princeton economist, New York Times columnist and recent Nobel laureate, bashed Geithner's plan before it was even formally announced. Wrote Krugman: "This plan will produce big gains for banks that didn't actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized."

Krugman and others have promoted nationalization of troubled banks, an idea that Obama aides have said would be hard to get through Congress. *