Wednesday, February 11, 2009

Why bad bank again?

It's of no surprise to me that the Feds couldn't come out with a detailed plan to purchase the toxic assets.

It sounds good on paper. Purchase the toxic assets, free the banks' balance sheets, and lending can resume. However, they've forgotten one important point. How do you price a toxic asset?

If it is doable in the first place, I'm sure all the biggest banks in the US would have gotten together to create a fund to dump these assets in. Remember Citi tried to do something like that way back when the crisis was at its infant stage? It never got off the ground.

There lies the problem. You cannot price it, you cannot sell it.

I would still think that the insurance idea will still work. Likewise, first you need to price your premium. Not all toxic assets are considered write offs. Price the risk of default accordingly, and insure maybe 90% of the cost value. After that, create a fund/bad bank that will own all those assets, and pay all the premiums. Note that all these so-called toxic assets are still generating income. It's just that the default rate is climbing. The bad bank can be half owned by the government, half by the other big US banks which created the mess in the first place. This would put a floor on all those losses, and maybe the economy can again function normally.

There is no way now anyone can escape this crisis without absorbing some sort of loss. Stop thinking of profits, and start thinking of how to turn the economy around. The argument I always hear is that why must the taxpayers bail out Wall Street. True... But look at the other perspective, who is the one borrowing more than they earn, that caused this crisis? The taxpayers....

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