Building Good Banks Instead Of Bad Banks

from the revisiting-the-idea dept

Tue, Feb 3rd 2009 12:01pm — Mike Masnick

Last year, we had an interesting discussion about using the government's bank bailout money not to bail out banks, but to build an entirely new set of banks that weren't encumbered by the problems of the legacy banks. It seems like that idea is worth revisiting, as there's been plenty of talk about having the existing banks dump a bunch of their "toxic assets" into a so-called "bad bank." The idea is gaining a lot of steam, but definitely worries a lot of people. Willem Buiter, however, has a different suggestion that harkens back to our older discussion: rather than creating a "bad bank" with all the toxic assets, why not create "good banks" instead and turn all of the legacy providers into "bad banks."

This would solve the biggest problem of the bad bank solution: which is that the government would effectively be paying for a ton of assets that no one has any idea how to value -- meaning there's a half decent chance that we (the taxpayers) will overspend on those assets. Instead, the "good bank" idea would be that those banks would then buy up the good assets from legacy banks -- which are good because they can actually be valued. The legacy banks then automatically become "bad banks," but the taxpayers are left with the good assets, rather than the toxic ones. Buiter then suggests that those legacy banks have their banking licenses taken away so that they can't do any new business -- but can only look to wind down or sell whatever remaining assets they have. Effectively, this system would also avoid rewarding the shareholders of those legacy banks (though, they could still receive something from whatever's left over after the sale of the various assets).

In actuality, this is a suggestion for rebuilding the entire banking system, and throwing off the old banks. It's still pretty risky, however, and plenty of folks in the US would be horrified (of course) at the idea of the government effectively owning the entire "good" banking sector. Still, if you could set it up in a way that allows the system to quickly, but safely, transfer over to private ownership, the idea does seem significantly better than the bad bank solution. That said... you have to wonder why the government is needed to fund the banks under this scenario at all. Why aren't private investors putting up the money to buy up the "good" assets of the legacy banks? Are they still just too afraid to spend? Too afraid that "good assets" are really toxic? Or are the banks too afraid to sell any of the good assets?

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Filed Under: bad banks, bailout, financial crisis, good banks

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Chris Maresca (profile), 3 Feb 2009 @ 12:13pm

Starting a bank...
... I've recently thought that starting a bank would be a good business in the current economy, partially because of the dynamics you discuss, but also because people don't trust bankers.
There's a remarkable story about the guy who started Bank of America. One of the interesting points is how, after the 1906 San Francisco earthquake, he put a stall out on the docks and just started lending money to people to rebuild and buy building supplies. That's the attitude we need now.
Another interesting development is the Lending Club. The founder told me that they have never done better, which is not really surprising given the current lack of lending....
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Xiera, 3 Feb 2009 @ 12:38pm

Government ownership or private ownership, the desire to make profits is still going to pose problems in the future.

Though it pains me to suggest it, maybe increased regulation or better auditing in certain areas of banking would actually help. At the very least, I think it would restore the public's trust in the banking industry.
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Mark Horne, 3 Feb 2009 @ 12:38pm

good banks? They are already here but being punished by TARP
My understanding that there are plenty of good banks--small and medium-sized institutions that aren't pals with Paulson or whoever.. If it weren't for the bailout, these would be in a position to buy up what would be left of CitiGroup and others when they went bankrupt. Instead, they get taxed to keep their bigger competitors going....
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Anonymous Coward, 3 Feb 2009 @ 12:47pm

If you don't know which assets are good, then how can the "Good Banks" buy up the good assets?
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Evil Mike, 3 Feb 2009 @ 12:53pm

Better Banking
If we're going to build a better banking system, why don't we start with nationalizing the "Central Bank" (aka Federal Reserve)?

The last thing we really need is a private corporation printing as much worthless money as they feel like.

Plus, let's have "honest" money, dollars which are backed by something real (regardless of what said real thing is).
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Logo, 3 Feb 2009 @ 1:16pm

The Idea I've heard and liked
This gist of this idea comes from my dad of all people but I liked it so I thought I'd share though neither of us are economists. If investors are afraid to buy the good assets from banks then why don't we use the bail out money to back these investments? So for private investors willing to buy up these good bank assets the US government will give them a guarantee on their investment. If things go well the investor has helped start a new and better banking system, the investor has earned some money from the success, and the US government and tax payers pay next to nothing. If things go wrong then we have to pay out to the investor (with the 'bailout' money). Of course this could be applied to more systems than just banking.

The general concept is why hand out a ton of money and then hope things improve enough to cover the current problems AND make up for the all the money we handed out when we could start with trying to make things better and THEN hand out money if things get worse.

I know it's probably too simple and full of some problem (other than just administration) to work but I thought it was an interesting idea at least.
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Joel Coehoorn, 3 Feb 2009 @ 1:24pm

Not for sale
The simple answer to this is that the good assets aren't for sale. They're profitable: why would the banks be interested in selling them?
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Joel Coehoorn, 3 Feb 2009 @ 1:34pm

alternative
The best idea I've heard is that the government should get more directly involved in all the foreclosures at the heart of the mess.

When you have a situation where someone has an adjustable rate mortgage that has recently gone up and is facing foreclosure, the government should make a loan to that individual. This loan would cover the full amount of the property. Instead, the money would go to the bank and be just enough that the homeowner's mortgage payment is returned to the level prior to the rate adjustment. In return, the government gets an equity percentage in the property that goes down and the loan is repaid.

This is better for the homeowner, make the bank "whole", and is much cheaper and more likely to succeed for the government. There would need to be additional controls, such that you aren't guaranteed to get a lone and taking one is somewhat distasteful. Otherwise ARMs would just come back as too easy an option. But I think the idea has merit.
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Joel Coehoorn, 3 Feb 2009 @ 1:45pm

Re: alternative
Arg.

> This loan would cover the full amount of the property

should read:

"This loan would NOT cover the full amount of the property."
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Clay, 3 Feb 2009 @ 1:47pm

Scrap all these "bad ideas"
The only way to fix our current problems is to let the recession occur. We've allowed it to happen for decades before and we recovered right? Why is it that a recession is no longer acceptable in society?

Thanks to this dipshit "stimulus" package, the recession is only going to be postponed(a year at most). On top of that, it'll be many times worse because we've just created more debt. All the "jobs" this $900 billion is supposed to create are really only temporary work at best, and the few jobs it does create are all government jobs which will only cause the debt to rack up faster!

I'm usually anti-doom-and-gloom, but we're truly eff'n screwed now. Unemployment office, here comes 20% of America!
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pinakidion, 3 Feb 2009 @ 2:02pm

Re: good banks? They are already here but being punished by TARP
Two small banks in good shape received TARP funds.

List of Funded Banks

Details about two local banks on the list

Adbanc, Inc

$12,720,000

Country Bank Shares, Inc.

$7,525,000

Still, this doesn't seem to balance out in the end. It seems like every bank would have to get money for this plan to work.
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diesel mcfadden, 3 Feb 2009 @ 2:20pm

Sal Khan explains the good bank concept towards the end of his interview on CNN. Also an excellent explainer of the current crisis.

http://www.youtube.com/watch?v=_ZAlj2gu0eM

His suggestion to solve private ownership problem: The government creates 300 million shares in the good bank(s) and give 1 share to each citizen, much like the $600 tax rebate last year. Assuming the shares could trade, boom, instant private ownership. Or some variation on this theme. The capital is provided by the taxpayers, why not divide the new bank ownership as well.

Detailed explanation on creating a "new good bank" solution here: http://www.youtube.com/watch?v=_ZAlj2gu0eM
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hegemon13, 3 Feb 2009 @ 2:33pm

Scary
"Still, if you could set it up in a way that allows the system to quickly, but safely, transfer over to private ownership..."

That scares the hell out of me, especially coming from someone as cynical as you, Mike. Just because it is set up that way does not mean it will ever actually happen. Do you really think the government would easily or voluntarily give up the enormous power that would come with such control over the financial sector? There would be delay after delay, with the government eventually declaring that "for the good of the public," it must retain control over the financial sector.
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eunos94, 3 Feb 2009 @ 3:31pm

Credit Unions
It should be noted that all of the attention primarily focuses on banks. America's Credit Union's have weathered most of this storm without much assistance. There has been no Credit Union bailout. Credit Unions are largely still lending to their members and are in much better shape than corresponding size banks. Credit Unions range from small (several millions in assets) to fairly large (several billions), so it's not like we're talking about a different animal. Just a group of people focused on returning money to the people that deposited it, not a bunch of stock holders. Take a look down the street at the local Credit Union. Their members are largely safe and sound, getting the same returns on their deposits as the banks, paying better rates on their loans, and not wondering if everything will still be there tomorrow.

Yes, I belong to a Credit Union. I love it and I'll keep preaching the faith.
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Lucas, 3 Feb 2009 @ 3:41pm

All of the plans which require massive government-led "restructuring" or "refinancing" will fail, because they are led by the government.

It has over $10 trillion in debt, plus the Fed and the FDIC have assumed $5 trillion of private debt in the past year. They've doubled the monetary base, which will show itself in price inflation when the major banks stop depositing excess reserves in the Fed.

Now, before the Great Nationalization of '08, the banking system was nowhere near "free" or "unregulated". Major banks have been cartelized into the Federal Reserve, which has special government powers and is both private and public. This allows the banks to lower the rate of interest below market levels. Since lending requires not-consuming on the part of someone, a lower rate of interest encourages businesses to spend as though more resources had been saved than actually have.

We are reaping the results of this. Greenspan's 1% federal funds rate led to 15 years of long-term planning and execution- factories, services, buildings, parts, labor, etc.- which assumed the wrong amount (too many) of resources.

So now there is too much capital and too many laborers employed in, as it turns out, unprofitable occupations. We could let the prices of everything fall until new owners assumed them. But two problems: the preposterous and continual rise in housing prices (caused by low interest rates) has led to "assets" which, we see now, are worth nothing at all.

Someone has to fail- the taxpayer or the current structures (the private banks) which own the bad assets. If we go with the bankers, we get 1 or 2 years of especially low unemployment (and the inflation we've cause to solve it is now unavoidable). If we let the corrupt government play SimCity with our money, we'll get another 5 to 10 years of depression as we continue to act with the wrong conception of available resources.
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anymouse, 3 Feb 2009 @ 3:54pm

We've been in a recession for 8 years... nobody noticed
We've been in a 'recession condition' since Bush took office. There is a reason we had to go to war, it's the easiest way to 'put off' a pending recession. Increased military spending across the board (not just by the military itself, but by the troops, their families, loved ones, support groups, etc) has been used to 'stall' the recession while Bush and his cronies plundered the economy for all they could. The last 8 years were nothing but a money grab by Bush and other politicians (and their buddies, families, cronies, etc) while they kept the American People distracted with various 'military' maneuvers.

Imagine 2 people standing at a table of money, when one guy points behind the other one and says, "OH MY GOD, what the hell is that??", then grabs a bunch of money while the other person is looking behind to see what the commotion was about. Now realize that Bush/Politicians/Corporations/Lobbiests are one side of the table, while the American people are on the other side, and our tax money is sitting on the table, "Oh look, we're going to need more troops in Iraq." Yep, there went your money....
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Mike (profile), 3 Feb 2009 @ 5:06pm

Re: Scary
That scares the hell out of me, especially coming from someone as cynical as you, Mike. Just because it is set up that way does not mean it will ever actually happen. Do you really think the government would easily or voluntarily give up the enormous power that would come with such control over the financial sector?

No, I don't think it would really happen that easily, but if this is the route we're going down...
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Anonymous Coward, 3 Feb 2009 @ 6:55pm

banksters
Well, it looks like the banksters have finally found a way to shake down large governments
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Evil Mike, 4 Feb 2009 @ 5:46am

Re:
Psst! The "Federal Reserve" is about as Federal as "Federal Express." Greenspan head up a PRIVATE CORPORATION which is expressly given the power to fuck you over via the money supply.

National Banks are always a bad idea!!
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w klink, 4 Feb 2009 @ 6:39am

B of A (was Re: Starting a bank...)
Interesting, but note that THAT Bank of America no longer exists. It was bought by Nationsbank in 1999. Since "Bank of America" was such a great name, Nationsbank too that name after the merger.
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Ronald J Riley (profile), 4 Feb 2009 @ 7:03am

How about building on credit unions?
I very much agree with building a replacement banking system and allowing the existing banks to go the way of dinosaurs.

What I have not seen is discussion about credit unions as an alternative. They are solvent and did not let greed and short term management get in the way of prudent business conduct.

Also, everyone can do their part to force this transition by moving their banking to credit unions.

Mike, your post on this demonstrates that you have some potential. Now all you need to do is get off the "free" business model, at least trying to force it on those who do not believe such is in their business interests and you need to stop spewing all that nonsense about patents.

Rather then advocating socializing others inventions you need to start inventing yourself, and giving those inventions all away for free:) If you really have what it takes you need to show us and otherwise you need to stop talking about a topic which you know absolutely nothing.

Ronald J. Riley,

Speaking only on my own behalf.
Affiliations:
President - www.PIAUSA.org - RJR act PIAUSA.org
Executive Director - www.InventorEd.org - RJR at InvEd.org
Senior Fellow - www.PatentPolicy.org
President - Alliance for American Innovation
Caretaker of Intellectual Property Creators on behalf of deceased founder Paul Heckel
Washington, DC
Direct (810) 597-0194 / (202) 318-1595 - 9 am to 9 pm EST.
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Ana B, 4 Feb 2009 @ 7:11am

Re: good banks? They are already here but being punished by TARP
That's exactly it - the banks chummy with the cartel get money from you, the taxpayer, to survive and keep paying huge bonuses while would be usurpers are forcibly kept down.
There are plenty of good institutions that in a sane world would thrive and benefit us all.
However, in our highly corrupt country the big boys keep them down and will continue to suck money out of productive hands for years to come.
If this sounds familiar to anyone, it is called Fascism.
Fascism can go on like that for decades as America squanders the wealth that previous productive generations made and slowly declines to resemble a version of south america.

cheers.
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Grant Hamilton, 4 Feb 2009 @ 9:30am

the worst bank of them all...
Here is the solution: http://www.youtube.com/watch?v=nNumEm2NzQA
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Joel Coehoorn, 4 Feb 2009 @ 10:09am

Re: How about building on credit unions?
Mike is not trying to force a "free" business model on you.

He is a proponent of the ideas that:
1) The economic factors indicate _the market_ will eventually force a free business model on you.
2) You can make _more money_ with that business model anyway.
3) You don't deserve any additional or new government protections on top of what are already available.
4) In fact, economics _predict_ that protections already out there are ultimately hurting your business and the economy at large more than they help it.
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Daniel, 5 Feb 2009 @ 6:05am

Re: Not for sale
The whole point of bad assets is that they cannot be sold because the market doesn't know how to price them. The banks could sell the bad assets for very little but they are afraid to sell them because they would certainly lose money now and the bad assets might someday be valuable. So when the banks need money they sell their good assets, turning themselves into "bad banks" without any help from the government.

According to the Planet Money podcast ("Japan's lost lesson") when Japan had a real estate crash followed by a precipitous stock market crash in the 90's, their banks behaved this way, and when they no longer had any real assets the owners essentially gambled (because there was nothing to lose) instead of acting intelligently.
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