Lynn Tilton has gotten her hands dirty in toxic assets and bad banks before, and sees "fatal flaw s " with the Obama administration's plan to kick start the credit markets and make the U.S. financial industry healthy again.

Tilton, the CEO of $6 billion private-equity firm Patriarch Partners, was responsible for creating a "bad-bank" structure for FleetBank, used in 2000 to unload $1.35 billion in troubled loans several years before it was absorbed by Bank of America ( BAC). Tilton engineered a similar deal for CIBC the following year.

She holds a patent for a valuation method that she says effectively finds a middle-ground price for troubled assets weighing down banks' balance sheets. Banks have been unwilling to sell at the fire-sale bids they have received since the financial crisis heated up last year, and investors like private-equity funds and hedge funds have not yet raised offers on their own, either because they are unwilling or unable to obtain financing to do so.

Tilton has been involved in the industry for nearly three decades, and cut her teeth making deals at Morgan Stanley ( MS), Goldman Sachs ( GS), Merrill Lynch and Oppenheimer ( OPY), as well as private firms. Patriarch makes direct investments in over 70 middle-market distressed businesses, including manufacturing, technology, health care and staffing and services companies.

Following is an interview, edited for style and length, about Tilton's views on the Public Private Investment Program that promises to spend up to $1 trillion in government funds to finance toxic-debt deals. What do you think of the PPIP as outlined today?

Lynn Tilton: I think this is good socially, and a good step in the right direction, but I don't think you have mutually aligned incentives. I don't think it will work.

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