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Page history last edited by Brian D Butler 11 years, 5 months ago

solving the credit crisis of 2007

fiscal stimulus and crisis recovery 2009


Beyond freeing the good bank to make new loans, the structure has several other benefits that could help today's banks, Bleier added.
Jettisoning bad assets immediately improves the good bank's debt ratings, which can reduce borrowing costs and boost earnings.
Banks like to protect relationships they have with major borrowers, so they're often reluctant to push hard to collect bad debt. But if the troubled assets are managed by a separate entity, that potential conflict is minimized, Bleier said.
The new, bad bank can focus on getting value out of the troubled debt as quickly as possible. That's different from regular banks, which often hold on to loans for a long time to try to squeeze as much money out of the assets as possible, he added.







1.  Getting banks to accept loss



Problem with a bad-bank: "So long as a bank can rely on the government to prevent a run (thanks to the government’s guarantee that creditors of large banks won’t take losses; i.e. “no more Lehman’s”) the banks current owners may prefer to sit on its toxic assets and hope the market recovers. Finding private buyers doesn’t solve this problem. No bank has much incentive to sell its toxic assets at a price that would leave the bank bankrupt. Not selling is one way of gambling for redemption."  Brad Setser



2.  How to value "bad assets"


However, such solutions would still be plagued by the now-familiar problem of how to value the troubled assets, Bleier warned.
"Mellon knew the assets really well because they were our own," Bleier said. "But it still took several months to value them and get a fair price at which to transfer them to the bad bank."
Today, many of the assets plaguing banks are the product of securitization, in which loans are packaged into securities that are then sold on to a wide range of investors. Banks often hold such asset-backed securities, but weren't involved in originating the underlying loans. This may mean they know less about the assets, which makes them harder to value.
That will make it tricky to agree on a fair price at which to transfer troubled assets to new bad banks, Bleier said.

The huge write-downs that may be required after the transfers also pose a problem and will probably require the government to provide more capital, he added.



Two types:


There are two basic models for this. Under the first, bank mitosis, each individual bank splits into a good and bad bank, with the bad bank purchasing the good bank’s toxic assets by obtaining separate funding, most likely coming in part from the government. Under the second model, a single "aggregator" bank is created and funded by the government, which would purchase the toxic assets of many banks. Regardless of the model chosen, two problems remain: how much to pay for the bad assets—if market values are used, the good banks will be insolvent and will require recapitalization, while paying book value is a giveaway to bank shareholders—and how to distinguish between good and bad assets.

>> Read full op-ed






macro man blog : http://macro-man.blogspot.com/2009/01/will-they-or-wont-they.html


Of course, an exact replica of RTC is not on the cards; that agency took assets off of bankrupt institutions, whereas today the object is to stop everyone from going bankrupt. How the bad bank would work is currently uncertain; what price would they pay, what incentive would banks have to offload their turds, etc. Simply having the FDIC standing on a street corner, Salvation Army-style, with a big bucket marked "turds" wouldn't appear to be an ideal solution.



FDIC to run the Bad Bank in the US?











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