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Create a Good 'Bad Bank' to Ease Crisis

Institutions must write down toxic assets to ease larger woes

By Jim O'Neill,  Newser User

Posted Jan 22, 2009 8:44 AM CST
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(Newser) – The world’s banking crisis is entering its endgame, and it’s time to shore up the most troubled institutions using a strategy that worked in Sweden in the 1990s, writes David Roche in the Wall Street Journal. It won't be easy, he warns: "A good bad bank forces banks to write down their bad assets and cleanse their balance sheets with those made insolvent being recapitalized, nationalized, or liquidated by the state."

"The only exit from the credit crisis involves a return to thrift by the overleveraged," and the stopgap measures employed so far are only making the problem worse, Roche contends. It's not enough to expand credit when deflation is looming. "The bad assets will continue to suck resources out of the economic system in the form of zombie borrowers, misallocation and mispricing of capital, public sector debt, and budget deficits."

Britain announced a second rescue plan for the country's ailing banks, hoping to thaw frozen lending by offering to insure banks against large-scale losses on bad assets they already hold.
Britain announced a second rescue plan for the country's ailing banks, hoping to thaw frozen lending by offering to insure banks against large-scale losses on bad assets they already hold.   (AP Photo/Matt Dunham)
A customer uses a Bank of America ATM in Los Angeles. Escalating credit costs forced Bank of America Corp. to report a $2.39 billion fourth-quarter loss.
A customer uses a Bank of America ATM in Los Angeles. Escalating credit costs forced Bank of America Corp. to report a $2.39 billion fourth-quarter loss.   (AP Photo/Damian Dovarganes)
Citigroup Inc. announced its latest attempt to become profitable: Splitting into two pieces. Citigroup has had five straight losing quarters.
Citigroup Inc. announced its latest attempt to become profitable: Splitting into two pieces. Citigroup has had five straight losing quarters.   (AP Photo/Richard Drew, file)
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In today's money, the U.S. government alone has spent (counting fiscal spending, not Fed liquidity injections) a sufficient amount of money on the credit crisis to fund two Vietnam Wars. - David Roche

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COMMENTS
Showing 3 of 3 comments
Newser001
Jan 22, 2009 7:35 PM CST
The aspect is troubling, but I will agree, nationalizing is an option. But the question arises, how many banks are we willing to nationalize… How many should fail and fall by the wayside? I can't see and endless line... The FDIC insured accounts to specific deposits. Those who didn't abide by the FDIC guidelines will just have to each crow on those amounts, above the insured guarantees...
Guest
Jan 22, 2009 5:59 AM CST
Lets not be too rash. There has been a lot of back lash against this idea particularly from Paul Krugman. It is certainly not the only solution out there. The other main suggestion, by the way, is nationalization.
Newser001
Jan 21, 2009 9:16 PM CST
It's the only reasonable answer...

Government weighs creating a bad bank
Financial Times (UK)

Germany looking for 'bad bank' alternative
Reuters

 
nationalization • credit crisis • banking industry • financial crisis • toxic assets

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