Will these banks later compete with the good banks after the crisis is over, or are they just temporary and will later be disbanded?

I'd love to be able to sell my mortgage to a "bad me" and let some sort of taxpayer bailout deal with the payment.

Shouldn't the banks that created this mess be labelled "bad banks"? Then the Fed can create "good banks" that don't employ any of the asshats who screwed things up to being with.

Also, Paddy draws a mean igloo. I'd want him on my team for Win, Lose or Draw.

@Blueskylaw: well, take a look at the "resolution trust corporation" for precedent. the RTC was the entity that liquidated failed s&l's during the late 80's.

i think it actually turned a profit for taxpayers before it was ultimately folded into the fdic in the mid-90s.

Is there such a thing as a "good" bank?

So long as the Fed only puts a fixed amount of money into the banks all at once, then it's all peachy (minus the fact that it costs us money, but we'll just have to live with that for a while).

If the Fed sets up a bad bank, then starts pumping money continuously into it over the next five or ten years, they'll be creating an even bigger black hole than the one that started this mess. If investors can even buy shares, well, the next financial meltdown will swallow us in no time. Also, they better be ready to set up a good number of banks, for culling purposes.

You know I'm really not a fan of this guy. He gets facts correct but his analysis or end conclusions are way off.

First off you don't make money with bad assets. Thats wishful thinking at its best. They would not be force sold if you could get some (even slight) profit from them.

Second, guess who is going to be offered these toxic assets. The suckers. Thats right, you and me. So you'll lose out either way. (Worse if you decide to buy what they are trying to sell.)

And last, the banks that caused this mess in the first place aren't just still around. They have been funded by the bailout money. And most have deep ties into government.

Keynesian economics is great for measuring very short term market trends when things are stable. I still cannot believe it's being used for long term forecasting. It's worse than useless for long term trends, it's down right dangerous.

@sirellyn:

First off you don't make money with bad assets. Thats wishful thinking at its best. They would not be force sold if you could get some (even slight) profit from them.

The thing with the "toxic" debt is that nobody knows what it's worth. Most of the mortgage backed securities are so convoluted that it's hard to know what is in it, let alone how many people will repay their mortgages or what the properties are worth if they are resold.

I think it's possible that they could make money on them, if they buy them cheaply enough and if housing prices go up at some point. Because banks want to get questionable debt off their books, they are willing to sell it cheap.

@madanthony: "The thing with the "toxic" debt is that nobody knows what it's worth."

That's because it's not technically WORTH anything, for crying out loud.

It is a semi-worthless thing that has been part of a bubble, and will be again.

Read "Extraordinary Popular Delusions and the Madness of Crowds" and the section on the Tulip craze. It's not *exactly* the same but the principles are similar.

They don't call it TOXIC DEBT for nothing, you know. Whoever gets stuck with it in the end is going to get burned. And of course, it will be the taxpayer. It's always the taxpayer.

@sirellyn: You know I'm really not a fan of this guy. He gets facts correct but his analysis or end conclusions are way off.

Agreed. I think this is a case of a sophisticated-sounding accent being mistaken for competence.

@savdavid: i would certainly consider mutual savings banks "good banks". that is, until they get raided & convert their charter to a commercial bank.

"UBS did this recently with their toxic assets. They took their worst paper, created an entity, leaving them with relatively good paper that allowed them to move forward. Of course, they had to write down the bad paper, which made them take a hit on their balance sheet. But it allowed them to move past their [stupid decisions]."

This sounds like what should happen and doesn't involve nationalizing yet more of our financial sector. It's absurd that, if UBS did this, took their hit, and kept going, without working people being forced to buy their junk, that this is the optimal model. Why don't we try that first?

I dunno if making the analogy of 'state of the art' mountaineering gear to the bad mortgages is very good. Those are more like big smelly turds that you should just fling off the cliff or bury in the snow so the next guy doesn't step in it...

@AngrySicilian: So, your budget depends upon having an evil twin?

You know, that's smarter than anything Jim Cramer ever said.

@sirellyn: I'm under the impression that toxic assets are like (to ape Paddy's technique of economics via metaphor) that version of Russian Roulette played with identical chocolates. Some are solid chocolate, some are hollow, some are filled with Kahlua, and some are filled with Tabasco sauce. A certain percentage are filled with Tabasco, which is considered a loss, but that percentage is unknown and can only be estimated. Right now, banks will buy the assets only for what they're statistically worth (if there's a 25% chance the mortgage will be paid off properly, it's only worth 25% or less of what it's projected to be). The chance changes with market conditions, since many of these assets are based on debt owned by consumers, and consumers can better pay off a debt in a good economy than a bad one.

Source: [candyaddict.com]

Anyway, the idea is that if the government buys these assets off the "normal" banks at a relatively good price and uses the assets to establish bad banks. Hopefully, the assets will improve in line with the economy and lower the amount of money the government loses in the long term, with breaking even or making a profit being the best case scenerio. The theory is that this will take away enough of the risk the big banks and businesses are facing, and thus it will cause the economy to move again. That helps the assets, which then help pay off the government's actions. It's a gamble, but most people probably prefer the government to do something rather than wait for market forces to restore order. The free market isn't very popular when it isn't working.

@Trai_Dep: The banks in America probably know that if they twist the government's arm hard enough, they'll get a fairly nice option rather than having to take damage for creating the bad entity. Or maybe it's just fear that if they do it, they'll fall behind the competition and investors will dump stock, making a bad situation for them worse.

Probably a little of column A and a little of column B.

@ZukeZuke: Just think of it in terms of gadgets. If you buy every gadget that looks cool at the trade show or on the front page of Woot, you're bound to get some good stuff and some crap, and be a lot poorer for it. That's how I see it working.