One More Time: Create 100 new banks

In October, I suggested that one way out of the mess we're in is to create 100 new banks that would be unencumbered by all the bad bets that incumbent banks have made. Back then, I thought that such a plan would create banks that people would be more confident to do business with. Now, the Wall Street Journal has come along with a similar proposal. I am glad for the company and only wish it had come along before so many hundreds of billions had been added to the so-far dubiously successful bailouts.

The advantages of creating new banks outweigh the disadvantages. Sure, the new banks would give some customers the jitters due to their novelty, and if they were successful, they would speed up the demise of the weaker banks. But on the plus side, if the new banks were adequately capitalized and tightly monitored, many depositors and borrowers would flock to these new banks since they'd be free from all the bad assets that currently crimp many existing ones.

Moreover, among all the recently unemployed bankers, there could be some talented and ethical managers who might be willing and able to take over these new banks and happily recruit some of their colleagues from the weaker incumbents to these growing new banks. Eventually, the failing banks would shrink and could quietly liquidate -- but not before their customers had made the successful journey to the new, healthy banks. While this is not a perfect process, it seems better than throwing hundreds of billions in taxpayer money at banks that will eventually fail anyway.

I think this is an idea whose time has come.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book, You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing, will be published by Portfolio on December 26, 2008.