I’m confused by all this talk of ‘bad banks’. It doesn’t seem possible to make it work… If a government sets up a bad bank and attempts to transfer into the bad assets sitting on the ‘good’ banks books several things will happen:
- the bad assets will get assigned a price, and that price should reflect the quality of the asset. Which is to say that being a bad asset it doesn’t have much value, otherwise it would be good. If the bank is forced to sell it to the bad bank at what it is worth, it will result in a huge write down for the bank, and in most cases force it into bankruptcy. If the government pays the banks what the bank wants the asset to be worth, the government (you and i, in essence) will be getting ripped off, big style.
- the government will have to nationalise the banks in order to force them to accept asset prices that are not in their interest, wiping out the stockholders, and destroying confidence in the stock market. Given the number of institutions (pension funds, mutual funds, etc) that hold bank stocks, this seems… bad, big style.
- the money will flow out of any bank the government doesn’t nationalise. This is because a nationalised bank is essentially safe; it has the government standing behind it (in the case of the UK that might not be the best guarantee, but it’s likely better than having to rely on the criminals that currently run the banks). Consequently in order to save the banks that don’t need saving, the government will have to nationalise the entire banking system, replacing (in the case of America) thousands of boards, and setting up bureaucracy to run thousands of institutions.
At this point i think it’s pretty clear that it’s either not going to happen, or it’s going to be a cluster fuck of epic proportions… my money is on the later.
Short of actually pulling the plug on the worst offenders and letting the cards fall where they will, this whole situation seems destined to drag on for decades as a form of sham banking system, as the bad assets are slooooowly written off at a pace that doesn’t force insolvency proceedings to start. A sort of ‘look the other way and hold your nose for a decade’ scenario. This is Japan’s much derided ‘zombie bank’ solution. Anything else means coming to terms with the idea that ‘too big to fail’ has now become ‘too big to save’.
If there is ever going to be an event that convinces you that the whole ‘free market capitalism’ thing was a fraud, this should be it.