Create a 'good bank,' not a 'bad bank'

Posted Jan 26th 2009 3:03PM by Connie Madon
Filed under: Management, Housing, Federal Reserve, Financial Crisis

There is talk by the Federal Reserve, the U.S. Treasury, the U.S. Congress and bankers about creating a "bad bank" and let the government use the next tranche of the bailout money to take the losses from the banks and put them in this bad bank.

First of all, why anyone would want to create something "bad" is beyond a rational person's comprehension. Why not create something "good." Why not take the second half of the TARP money and create a "good bank,"one that is solvent, a bank that everyone can trust, a bank for the future not the past. If we create a "bad bank," there is no future. The money is just wasted again.

The "good bank" would start with $350 billion dollars of TARP money. Then all you need to do is to set a time period for everyone to transfer their assets into the "good bank," if they choose to do so. All deposits are insured by the FDIC. Then use this $350 billion dollar bank to refinance home mortgages at 4.25%, thereby giving Americans more money to spend and at the same time slowing down home foreclosures. These mortgages are federally insured.

We have seen that derivatives are the main source of our current banking mess. Therefore, establish a rule that derivatives are strictly forbidden.

As for banks losing money, let them take their losses or shut their doors. Americans need to feel safe and secure again and protecting their money is a big first step. And by the way don't worry about a big bank failing. In 1995, Barings Bank collapsed due to losses caused by a rogue trader. Barings was the oldest bank in Britain. It was established in 1762 and had the Queen herself as a client. The bank was bought by Dutch ING for 1 British Pound.

What are your thoughts?

Tags: bad bank, BadBank, good bank, GoodBank, TARP money, TarpMoney

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Reader Comments (Page 1 of 1)

1-26-2009 @ 6:02PM

Jeff said...

I don't think a good bank would need $350 billion in TARP funding. You are arguing semantics.

1-26-2009 @ 6:04PM

TX CHL Instructor said...

How about just requiring banks to lend money in order to keep their charters?
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www.chl-tx.com

1-26-2009 @ 7:49PM

william lindblad said...

If I recall on Barings. it was a currency trader. That incident has no relevance to today's situation. Try J.P. Morgan in 1909 as that is why we have the Federal Reserve.
To stay with the blog - good bank, bad bank? Suppose a "bad bank" is created? Who gets to run it? We already tried this in the form of the RTC. and depending on who is doing the books, this operation supposedly recovered the taxpayer investment and actually returned a profit.
In truth, it was a crooked as it could get and the actual figures remain an enigma. The government put of a hundred billion or so - they don't even know the correct amount. So, how the hell do they know if they made a profit? Nothing like a little bull, and time, to provide the right spin. If the government creates this "bad bank" entity, be sure, the taxpayer will get more of the same. It's apparent, as the lawmakers could not get accountability only a few months after recent disbursements.
Thanks to the ever present media the only thing that the taxpayer gets is the bad new about parties, office redecorations and of course, the obvious freeze on credit. Thain, of the million dollar office, defended by saying that the office was not fit for business. That is why he needed a 7,000 dollar waste can. Yup, you right, I said a waste can, the same kind you can get in any retailer for under 10.00. 30-40 would get you high end. This guy is typical of the rest - a total asshole. And that, ladies and gentlemen, is why we are in the condition that we are.
The high paid morons that are running our banking system are continuing to perpetuate what they started. It started with greed and put them so far out of touch with the rest of the economic structure that they are - useless. If the government does not step up to task at hand and refuse to dole out any further bail out funds until entire slates of managers are replaced - and replaced with the down to earth - this is what you and I are going to get.
Humpty Dumpty sat on a wall. Humpty Dumpty had a great fall.
All the Kings horses and All the Kings men - could not put Humpty Dumpty together again.
In our case, it is not a nursery rhyme as it will become a reality, probably before Sept. If you want to see the future - look at Iceland.

1-30-2009 @ 12:27AM

Massimo GIANNINI said...

I have been proposing the good bank model solution to the crisis since October 2008 with comments here and there.

http://mgiannini.blogspot.com/2009/01/good-bad-an...

Now Prof. Buiter is working out some details. Let’s see if we are heard…