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‘Bad Bank’ Regains Favor As Solution for Toxic Debt

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Albert Bozzo,
Saturday, Jan 24, 2009

Bad bank. Good idea. Done deal?

Analysts say both Wall Street and Washington are largely resolved to creating a government-run entity to buy troubled assets from banks and other struggling financial institutions. It’s just a matter of how and when—and some say, the sooner the better.

“Get on with the process of putting a value on these assets and lifting them off the banks’ balance sheets,” says Robert Glauber, who supervised the Treasury Department’s role in the rescue of the savings and loan industry, which included a version of the bad bank concept, the Resolution Trust Corporation.

“No one wants to put money into these banks and see it become worth less,” he adds. “That has happened quarter after quarter.”

Momentum for the so-called aggregate bad bank asset-purchase plan has built quickly since Fed Chairman Ben Benrnake mentioned the idea in a wide-ranging speech last week.

FDIC Chairwoman Sheila Bair referred on Wednesday to the financial-aid options Bernanke outlined, telling CNBC the aggregate bad bank option “might have an advantage in the sense that it actually moves the assets off the balance sheets, freeing up lending capacity.”

Though some have scoffed at the resurfacing of the troubled asset purchase plan—which was the cornerstone of the TARP bailout package last fall. It was shelved by then-Treasury Secretary Paulson, who instead adopted a capital-injection model. Analysts say the continuing financial crisis underscores the concept’s utility and might even make it more attractive than before.

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This article was posted: Saturday, January 24, 2009 at 7:05 am

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