Building a mega-RTC

By Geert De Lombaerde Posted on January 16, 2009 at 12:13 pm

Hank Paulson and Sheila Bair mull a publicly owned ‘bad bank’ while the Maverecon makes the case for full-fledged and large-scale government ownership of lenders.

In addition, full public ownership of the banks would greatly facilitate the creation of a ‘bad bank’ that would hold on its balance sheet all the toxic assets (illiquid assets of highly uncertain value) currently held by the high street banks.  The key problem with any bad bank proposal is the price it pays for the toxic assets it acquires from the banks.  If all the banks, and the bad bank, are publicly owned, this problem goes away.  The toxic assets are simply moved to the balance sheet of the bad bank.  They could be valued at anything from zero to their notional value or historic cost (or even higher).  It would be a redistribution of wealth from one state-owned entity to another state-owned entity.

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Tags: bailout, banking, Federal Deposit Insurance Corp., good bank/bad bank, government ownership, Resolution Trust Corp., U.S. Department of the Treasury  

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