So I'm suffering through Morning Joe a few minutes ago as a consequence of my kid's school being snowed in, and Chuck Todd and some geezer are discussing the financial crisis. I couldn't help but think how bizarre it was to watch this guy not discussing an electorate map. Chuck promptly disrupted my ponder by speculating that, by Tuesday, Obama could set up a bad bank. "Bad bank?" I wondered, foolishly expecting Chuck to break into an explanation. Instead, he remarked something to the effect of, "I'll let the folks at home figure that one out."
With Google's help, I came up with the following:
The Federal Deposit Insurance Corp is aiming to take control of a widely mooted "bad bank," to be set up by the U.S. government to mop up toxic assets of struggling banks, Bloomberg News reported on Tuesday.
Numerous U.S. lawmakers expect the Obama administration to produce a new strategy soon for stabilizing the nation's troubled banks, and believe several options are under discussion.
CNBC reported that the Obama administration is set to announce the outlines of its financial rescue plan early next week.
A few weeks ago, Paul Krugman likened the idea to "rearranging the deck chairs on the titanic." He also wrote this:
The idea of setting up a "bad bank" or "aggregator bank" to take over the financial system’s troubled assets seems to be gaining steam. So let me go on record as saying that I don’t understand the proposal.
It comes back to the original questions about the TARP. Financial institutions that want to "get bad assets off their balance sheets" can do that any time they like, by writing those assets down to zero — or by selling them at whatever price they can. If we create a new institution to take over those assets, the $700 billion question is, at what price? And I still haven’t seen anything that explains how the price will be determined.
The next day, after conducting some research, Krugman characterized the idea as a "false analogy." To put it mildly, Krugman remained skeptical:
What people are thinking about, it’s pretty clear, is the Resolution Trust Corporation, which cleaned up the savings and loan mess. That’s a good role model, as far as it goes. But the creation of the RTC did not rescue the S&Ls.
(snip)
It looks as if we’re back to the idea that toxic waste is really, truly worth much more than anyone is willing to pay for it — and that if only we get the price "right", the banks will turn out to be solvent after all. In other words, we’re still in Super-SIV territory, the belief that fancy financial engineering can create value out of nothing.
Color me skeptical. I hope the buzz is wrong, and that something more substantive is being planned. Otherwise, we’re looking at Hankie Pankie II: Paulson may be gone, but officials are still determined to believe in financial magic.
All that aside, I still don't know what the hell a "bad bank" is or does. As far as I can tell (and someone please correct me if I'm wrong), setting up a bad bank is not the same as nationalizing banks. Where the heck is wikipedia when you need it?
According to Reuter's, the FDIC chairperson, Sheila Blair, thinks the effort could be financed with FDIC-insured bonds. The article also quotes Chris Dodd's sentiments that using a bad bank to "mop up toxic assets" makes sense. Casting doubt to the Chuck-Reuters speculation, Chris Dodd also noted that the Obama administration has not run the idea by him. As the U.S. Senate Banking Committee Chairman, he'd probably hear from Obama before he'd hear it from Chuck or Reuters.