Tuesday, January 27, 2009

Treasury's "bad bank"

Everyone is talking about the new "bad bank" proposal, and when will we have this so called "bad bank."

Sorry folks, I thought we had it already. I thought it was called the Federal Reserve!

Here's the plan though for the new "bad bank." This bad bank will acquire bad assets, at much higher prices than what they are worth. How is that working?

They will assume that they will hold these assets to maturity, and that the cost of the Government's funding is cheap. Thus, the spread is lower, and you, the taxpayer, take the losses of the banks on your backs!

Call it what it is. It's the Level III bank, funded by taxpayer, that bails out the idiot bankers!

For a more detailed idea of how this will work, click the links:

Or read this story I wrote last week. This is what Treasury is doing:

You can seize the banks, and wipe out their shareholders, and write down their "assets" that aren't worth what the banks say they are, to a level that you will actually find real buyers, and then give debt holders an equity stake, and it won't cost the taxpayer a penny.

But this will cost common and preferred shareholders, and bond holders, will get a haircut and the recapitalized equity.

Or you can get a TARP II, or a "bad bank" that will overpay by buying the toxic assets at prices that are fiction, to recapitalize the banking system and stick the taxpayer with the tab.

Now which plan do you think they will do?

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