Good Bank, Bad Bank

Wall Street, the last bastion of capitalism, received good news today. The markets (especially financial stocks) soared following reports that the Obama administration is giving strong consideration to the so-called "Good Bank, Bad Bank" alternative to the financial crisis.

The idea is fairly simple. Remove all the bad assets from the banks and "sell" them to someone at prices well above the current market prices. You can guess who'll be buying the toxic assets. Think of it as a TARP (Troubled Asset Relief Program) on steroids.

The premise is that banks will take advantage of the instant improvement in their balance sheets, and increase lending. Of course, all the evidence from the first $350 billion TARP installment is that it won't actually increase lending, and the banks will continue to hoard the cash.

The estimated loss to taxpayers is somewhere in the $3 trillion to $4 trillion range. Details are sketchy at this point, and it's not clear what, if anything, taxpayers will get in return. This is really not a new idea, and was considered when the Bush administration proposed the first TARP program. The critical question then and now: how much above the market value of these assets will the government pay?

It's really not much different than nationalizing the banks, except taxpayers don't get to keep the "good bank" capital or assets, which virtually guarantees a massive loss. More important to Wall Street, those who own bank bonds and stock have their assets preserved, which would not be the case if the banks were allowed to fail. Essentially, this is a direct subsidy to stock and bondholders.

Naturally, Wall Street thinks this is a great idea: the solution of "privatizing gains, but socializing losses" is even better than real capitalism.

I hope President Obama can find a better solution.