‘Bad Bank’ versus ‘Insurance Wrap’

Some people are suggesting that the bad idea of a bad bank is gaining momentum in the Obama administration; Others are suggesting that an insurance wrap around the toxic assets is the better approach:

“The Obama administration, aiming to overhaul the $700 billion financial-rescue program, is refocusing on an effort to guarantee illiquid assets against losses without taking them off banks’ balance sheets.

Treasury Secretary Timothy Geithner is skeptical of setting up a so-called bad bank to hold the toxic securities, an option that still may form part of the final package, people familiar with the matter said. Senator Charles Schumer yesterday said debt guarantees are becoming “a favorite choice” of options because a bad bank would be too costly.

The debate comes as some former officials warn against measures that stop short of stripping banks of the illiquid investments tied to mortgages and related securities. Government protection for $400 billion of Citigroup Inc. and Bank of America Corp. assets hasn’t sparked investor confidence in the firms’ viability.

“The tough decisions need to be made,” Frederic Mishkin, a former Federal Reserve governor and research collaborator with Fed Chairman Ben S. Bernanke, said in a Bloomberg Television interview. “You have to make sure that when all is said and done, you actually have financial firms that are either healthy and the ones that are not healthy can’t stay in business.”

These both remain misguided attempts to rescue the banks instead of the financial sector and the economy.

Bad ideas . . .

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Source:
Toxic-Asset Guarantees Gain Momentum in U.S. Bank-Rescue Talks
Robert Schmidt
Bloomberg, Feb. 4 2009
http://www.bloomberg.com/apps/news?pid=20601087&sid=arG13cCBPnHY&

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