Obama Proposing FDIC Run Bad Bank; Will It Solve Problem?

President Obama may have the FDIC run a "bad bank" that will purchase the toxic assets from bank balance sheets. Sound familiar? But this bad bank doesn't solve the central issue, how to value thes toxic assets.

President Obama may have the FDIC run a "bad bank" that will purchase the toxic assets from bank balance sheets.  The news is being reported in most financial publications.

Bloomberg writes:

"The Federal Deposit Insurance Corp. may manage the so-called bad bank that the Obama administration is likely to set up as it tries to break the back of the credit crisis, two people familiar with the matter said. "

This is of course, TARP redux.  The original TARP was supposed to do just that.  Buy toxic assets and get them off bank balance sheets.  It was abandoned because no one could figure out how to price these assets.   The central pricing dilemma is this: price the assets to high and the banks are being subsidized at taxpayer expense.  Price them too low and the banks aren't receiving any real benefit from the sale of the assets.  Finding the middle ground is extremely difficult and no one has figured out how to do it.

Estimates put the cost of this plan at over $1 trillion.  The FDIC is exploring issuing debt backed by the agency to pay for the cost.  More debt, dubious outcomes - I don't know but I'm starting to wonder if it might be better to let these toxic assets sit and instead provide funding to banks that don't need to be bailed out. 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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