Bank stocks are poised to go higher Wednesday morning as word comes out the Obama administration may take a crack at breaking the credit crisis by creating a bad bank to buy up all the toxic assets clogging up U.S. financial institutions' balance sheets. Federal Deposit Insurance Corp. Chairman Sheila Bair is reportedly pushing for her agency to manage the institution, which would bankroll the effort by selling bonds guaranteed by the FDIC, with a healthy helping of taxpayer funds also likely.
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This option would involve the government's buying some of the riskiest
loans and assets from the banks, in return for government bonds, and
putting them into a "bad bank," which the government would run. An
administration official told
Bloomberg that an outline of the plan
could be presented as early as next week. Ideally, the "good banks" would then be able to attract private capital with their balance sheets cleared of landmines.
The "bad bank" approach does have its share of drawbacks however.
Setting it up would drive the bill on the $700 billion Troubled
Asset Relief Program up above the $1 trillion mark. After the perceived
mismanagement of the initial $350 billion in TARP money, getting
Congress to sign off on such a figure will be a tough sell for the new
president. Still, with the state of the economy getting worse every day,
Congress may be persuaded that it's better to try to break the back of the
crisis in the near term, rather than watch things worsen and have
voters accuse them of doing nothing to get the economy moving. -
George
White
See Bloomberg story
