As if there aren't enough damaged financial companies already limping on taxpayer subsidies, the
has floated the idea that maybe the government should start a "Bad Bank" of its own.
A bad bank collects damaged assets - loans on empty Miami condos, bonds backed by mortgages to subprime borrowers who aren't paying - at a discount, and sits on them until they can be sold at a better price.
That's close to what the
said the original federal TARP program was going to do. That was before the government decided it ought to spend that money buying bank stock instead, says
, chief executive officer of
Griffin Financial Group L.L.C.
, a Reading firm that advises banks on mergers and investments.
Why didn't TARP buy bad loans the first time? "Nobody was ready to buy loans from
at $1 when they were worth 20 cents," Harenza told me. But the billions spent to shore up Citigroup's capital since then haven't done the job, either.
Since property values have dropped, even profitable banks are weighed down with overpriced loans and property-backed bonds. Banks have to set aside money to
cover the paper losses on those assets. That means they can only make very conservative new loans - not the kind likely to boost new hiring or consumer spending.
An "aggregator bank" to buy bad assets is "the right direction," said
Stephen D. Steinour
, new chief executive at
Huntington Bancshares Inc.
, of Columbus, Ohio. "If you have risks on your balance sheet that are significant," you aren't going to approve too many loans. "We have to do things so there's a stability that the community can count on, to start getting us back to normal."
In a hearing last week,
Sen. Mike Crapo (R., Idaho)
, Obama's nominee for treasury secretary, how Geithner will make sure "the government will not overpay" for "questionable assets" in a government-run "bad bank." Geithner punted the question - "I am considering a range of ideas," he answered.
Sen. Max Baucus (D., Mont.)
, asked if it might work like the
Resolution Trust Corp.
, which sold billions in failed savings-and-loan assets in the late 1980s and early 1990s. No, said Geithner: RTC sold assets for banks that had already blown up. The new administration prefers solutions "that do not require causing institutions to fail, because bank failures are costly and disruptive."
The private sector has set up its own bad banks. In 1988, then-
Mellon Bank CEO Frank Cahouet
Grant Street National Bank
to run off more than $1 billion (that used to be a lot) of bad oil, development and foreign loans. Grant sold junk bonds and used the proceeds to buy Mellon's bad loans for about 40 cents on the dollar, reselling them at various markups as the economy unfroze in the early 1990s.
Harenza expects the government will create one or more bad banks that buy delinquent and nonperforming loans and bonds.
"They intend to get some asset managers in there who will say, 'Hey, the loan markets will come back some day, we will hold these. Even if we [pay] a premium, they will be worth more three or four years from now when the economy improves, when housing demand improves.' Then it works," Harenza said.
The big question, he added: "At what price do they buy the loans?" Too cheap, and banks have to write off the loss - which means they will need more capital, restricting them from making new loans. Pay more than private investors might be willing to offer - and taxpayers will complain we're getting ripped off.
But that could still be cheaper than having to take over banks that can't lend at all. "If they can find a way to get the loans off the books that will create investor confidence, that will involve a subsidy," Harenza said. "I bet, when the smoke clears, they will buy the assets above fair-market value."
Bucks County sales consultant
says he sees signs government financial policy may be having an impact - in unequal, maybe dangerous ways.
"Money for homes is loosening up. We got a letter from
telling us we are preapproved for a new, lower-percentage mortgage," Poole told me.
But he says his clients complain they can't get business credit cards at less than 25 percent. "I don't think credit for business is anywhere near as accessible" as home loans. Poole thinks that's the wrong way to fight a recession.