Setrak has posted about the anticipated 'Big Bang' that the Treasury Department will announce next week and it references the idea of a 'bad bank' that will purchase the bad assets from US banks as part of the effort to make them solvent: http://www.dailykos.com/...
The problem with the bad bank approach however, is that it leaves the share structure of the mismanaged banks intact and as such, leaves management intact. Where's accountability? Why shouldn't the shareholders take the risk of their investment's failure? And, why isn't the Swedish model for bank failure being pursued?
Update: Max Holmes proposes a hybrid model: http://www.nytimes.com/...
So far, I haven't read much about the bad bank idea that seems convincing. It doesn't impose consequences on shareholders, doesn't lead to management restructuring, doesn't give tax payers an upside to the investment we'll be making (unless the 'toxic' assets we take into the bad bank turn out to be amenable to restructuring or later recover their value).
Conversely, the approach used by Sweden seems more well-considered: http://www.nytimes.com/... There, the government did form an agency for overseeing sale of bad assets (in Sweden the 'bad' assets were in fact real estate, not securities backed by mortgages on real estate), but it also took warrants in the banks into which funds were invested, so that as shareholder, it could receive a share of profits when the banks again became profitable and the government made money in some cases when it disposed of the shares after the crisis was over.
What I haven't come across is a clear discussion of why this model may not be applicable in the US context. Do any Kossacks have insight on this point?
My fear is that either (a) Geithner's thinking is more of a piece with Paulson's approach than we may have hoped and doesn't see the need for equity, or (b) the Obama administration is concerned about political fallout from 'nationalizing' the banks and thus is shying away from using an approach such as that employed in Sweden in the early 1990's. Neither explanation gives me much comfort. Maybe others have better insights.
Thoughts?
Update: Max Holmes, adjunct prof at NYU's biz school has an op-ed piece in the 1/31 NYT, presenting a hybrid approach: http://www.nytimes.com/...
Looks like it has some good possibilities in adddressing some of the risks comments here have identified. Note, the approach he proposes of establishing one bad bank for each of the 4 largest US banks is quite similar to that used by China in the late 1990's/early 2000's to address is bad bank problem. At that time, commentators bemoaned the impending collapse of the state-owned banks that had operated as policy banks and which had lots of bad loans/assets on their books. The government established four (I recall) asset management companies, which were charged with acquiring and then disposing of the bad assets. China's banks then went on to raise massive amounts of equity by publicly listing in the HK and US stock markets. Who would have predicted that resul a decade ago!