United Liberty
“Bad Bank”, Bad Idea
Thu, 01/29/2009 - 12:54pm | posted by Austin Wilkes
After almost four months after the passage of TARP, whether right or wrong, I believe the concensus is clear: TARP, regarding its effectiveness thus far, has been a complete failure. The recent Senate vote on allocation of the remaining $350 billion backs up this claim with only a simple majority supporting Obama’s plea for the remaining cash.
Now the Obama Administration wants to right what it sees as the missteps of Paulson. It believes that Paulson’s plan was poorly executed (very true), but it refuses to look at the larger picture and see that the market’s poor reactions were not based on Paulson not saying the right things at the right time, but rather, the markets acting on their fear of creeping socialism (which means their equity stakes will be devalued or eliminated). The new plan being floated around the beltway now is one referred to as “good bank, bad bank” where the government nationalizes banks it deems strategically important, then sells off the good assets, while holding the bad assets until it decides the market has recovered enough to sell. This creates a situation where banks are effectively split into two (or more) pieces with good assets being sold back to the public as the “good bank” and bad assets being held by the government as the “bad bank”.
I must admit while the “good bank, bad bank” plan is significantly better than the original TARP, or really anything the government has done thus far, it still should be opposed on the very premise that it is nationalization, something that we are taught, cradle to grave, is not suppose to happen in America.
To sum up all the governments attempts at ‘fixing’ the economy: epic fail.
-David Carlson
http://www.davidcarlsonpolitics.com
The “Bad Bank” can be tailored made to ensure taxpayers do not lose any money, and to ensure all money “invested” by government can be used to create credit flow to solve the credit crunch.
The measures to ensure the “Bad Bank” to become “Good Bank” include :
1. Good Bank will purchase toxic assets from banks with loss compensation agreement that sellers will compensate the loss incurred by holding toxic assets to the “Good Bank”.
2. All money invested by “Good Bank” in toxic assets will be deposited in the “Good Bank”, as collaterals to ensure the sellers have adequate money to compensate the “Good Bank”, i.e. Good Bank buys $200 billion of toxic assets from banks, and the banks are required to deposit these $200 billion in the Good Bank as collaterals. In the balance sheets of banks, they sell toxic assets to Good Bank, and the money from selling toxic assets will become deposits in Good Bank. If the toxic assets are proved to worth only $100 billion, Good Bank will get compensation of $100 billion, and deduct the $100 billion from the banks’ accounts. Taxpayers will not lose any money.
3. Banks can get the money to fund their lending to creditworthy borrowers when they are going to make the lending to borrowers, and to present loan documents of the newly made loans as collaterals. Hence, banks cannot hoard the money from Good Bank without making loans to credit worthy borrowers. Good Bank receive collaterals from banks to ensure they have money to compensate Good Bank’s loss in purchase of toxic assets.
4. Good Bank can be lender of last resort to creditworthy business borrowers who are unable to get bank loans from money hoarding banks, by using the deposits of banks which sell toxic assets. If banks selling toxic assets do not make lending, they will have lots of money deposit in the Good Bank. Business borrowers who fail to obtain bank loans from banks can apply for loans from Good Bank. Good Bank will make bank loans based on credit rating of the borrowers, and will appoint banks to service the loans, by paying service fees to servicing banks. Good Bank does not need to spend money to open branches, and branches of servicing banks will become branches to service these creditworthy business borrowers. Hence, all creditworthy business borrowers with default risk lower than Good Bank’s required standard can get loans from banks, or Good Bank, if the lending scheme is run properly. If $200 billion is not adequate to meet the needs of creditworthy business borrowers, Good Bank can issued bonds to raise funds to finance these lending. If Good Bank is run properly, the risk premium should be adequate to cover the risk of business loans, and make money. In the worst case, if Good Bank makes loans of $2 trillion (13% of GDP), by using 10% capital ratio based on $200 billion “invested” by the government, incurred 15% bad debts ($300 billion), with average risk premium of 5%, the loss will be around $215 billion (1.43% of GDP). Spending of $215 billion to finance $2 trillion of loans, and 13% of GDP, will be much effective than spending $200 billion to finance employment of $200-400 billion by fiscal stimulus.
5. To discourage banks to refused loans to their existing creditworthy business borrowers and force them to borrow from Good Bank, any business loan borrowers from Good Bank will be service by banks which do not have any previous experience in refusing loans to these business borrowers. In other words, when a bank refuse loan to an existing client, this client will be serviced by another bank, and the bank refusing the loan will lose future business and deposits from this business borrower.
If Good Bank operates this way, government do not need to beg the banks to make lending to solve the credit crunch. If banks want to hoard the money, Good Bank can do the lending directly. In the future, when banks hoarding the money are in trouble again, government does not need to save them, and simply takes over them, and there will not be any banking crisis caused by these money hoarding banks
If “Bad Bank” does not operate this way, it may be a real bad bank.
Learn to write. You are terrible. After you are terrible after the beginning of the bad writing thus so bad thus far thus.
After almost four months after the passage of TARP, whether right or wrong, I believe the concensus is clear: TARP, in at least so far of its effectiveness thus far, has been a complete failure.
Are you kidding me? You are correcting someone elses ability to write?
How about an honest bank ? Abolish fractional reserves and all this trouble goes away.
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