Building Good Banks Instead Of Bad Banks

from the revisiting-the-idea dept

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?

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