It’s the boondoggle that won’t die: here is another trial balloon for the government’s bad bank concept.
In this version, the government kicks money into a variety of investment funds run by private managers, each of whom must put up a certain amount of money himself. They then go out and use non-recourse funding to go buy up bad assets.
This version suffers from the exact same problem as all the other plans, namely the refusal to accept the reality that the bad assets are actually bad (discussed yesterday here). If the bad assets traded for what buyers are willing to pay today, some banks would have negative equity. These banks refuse to sell – why acknowledge the situation when you can hope time will solve your problems – and are terrified someone else will sell similar enough securities that they will have to recognize a market value.
The government plan bends over backwards to accommodate these banks; it encourages buyers to pay more by lowering their borrowing costs, and if the loans really are non-recourse, making it a simple option with no downside to the manager.
Again, why? For the trouble of seeding new investment funds, why not seed new banks? Or better yet, buy the continuing operations of the major banks and let the shareholders sit with the old book of business; if the assets are really worth what they are carried on the books, it should be a great deal for the shareholders. If not, well, they took a risk.
Good to see the Krug agrees…