Over the past week there has be a resurgence in talk about the government creating a so called “bad bank” to help solve the financial crisis. The bad bank would step in and purchase toxic assets that are currently clogging up the balance sheets of U.S. banks. This would free up the bank’s balance sheets, and allow them to lend without having to worry about losses from bad assets. This was pretty much the original intent of the TARP bill.
The problem with the “bad bank” solution is that we really don’t know how much these toxic assets are worth. If the government ends up underpaying for these assets, then the banks may still need capital and they will still be reluctant to lend. On the other hand, if the government overpays for these assets than the taxpayer will suffer at the expense of the banks.
My solution is simple… instead of creating a “bad bank” to buy the toxic assets from the banks that screwed up, why don’t we just create a new bank from the ground up? This bank won’t have to worry about CDO’s, SIV’s and all that mumbo jumbo. Since the new bank wouldn’t have toxic assets on their books, they would be able to lend freely at lower rates than other banks. In theory here’s how it’d work…
*The government would provide $250 Billion to capitalize the creation of a new bank. The bank would be able to leverage this money and have over $2.5 Trillion in lending ability. This will allow the bank to take advantage of the huge spreads that currently exist between their costs to borrow and the rates they can charge to lend. Since the bank wouldn’t have bad assets, they’d be able to offer lower rates than are currently available from other banks. In time, this would force the other banks to lower their rates in order to remain competitive.
*For all intensive purposes the new bank would be a privately run operation. The government would act as a silent owner provided some guidelines are followed. For instance, they could stipulate that all earnings would be retained by the bank and used for expansion. Also, ten years from it’s opening the bank will go public and become a completely shareholder owned corporation with no ties to the government. The government will receive all proceeds from the IPO and hopefully a significant return on its investment.
Obviously I know my plan will never happen, but in theory I think it would work. Believe it or not now is a great time to be a bank, provided you don’t have billions in worthless assets on you books.
P.S. There are some details of my plan that I’m leaving out for simplicities sake. If anyone has any criticisms or critiques then I’ll elaborate further.
Couldn’t the Federal Reserve do this exact same thing right now?
Why bother with the overhead of creating a new bank…throw that 250 billion into the Fed and have them take care of it, to me it seems like they already fulfill the basic functions any semi-public “good” bank would need. With the base borrowing rate already near 0%, how can any bank go any lower?
Well the thing is The Fed can’t lend directly to people and businesses, only financial institutions. That’s why we really need functional banks. The banks are the ones who can lend to people and businesses so they can spend and grow the economy.
We wouldn’t want to set the precedent of The Fed lending to non financial institutions b/c there’d be no way grab back that power after the crisis is over. Plus it’d be a mess. You’d need more people to actually make and research the loans.
By creating a new bank that operated independently the government wouldn’t have to bail out the weak financial institutions. The new bank would have more lending power than all the weak banks currently do. Then after the crisis has past the government would profit by receiving all the proceeds from an IPO.
The key would really be the government being as little involved as possible. It would have to be a privately run bank so they can take prudent risks without having to worry about the government butting in all the time.
I work for a brand NEW bank with zero toxic assets and a clean balance sheet. Alternext symb. HNB So far so good.