Trillions More to Bail Out Banks? Bad Bank is a Bad Idea

It would be a terrible economic tipping point.

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How much more do you want to spend on the banks? Trillions more to either buy bad debt or to inject capital directly? Not a very appetizing prospect. Adding that total to the $900 billion "stimulus" plan will only result in a push toward economy-crippling taxes in the future. David Goldman of the great Inner Workings blog has a better plan:

Let banks hold the AAA subprimes on their books at par, and write them down only as cash flows are impaired. The writedown should simply be proportional to impairment. Then they can buy new securities if the cash flows seem attractive. ... AAA asset prices were artificially high under the stupid old regime of excessive leverage, and are artificially now after the collapse of levered structures. The market never had anything to do with it. It’s all been an artifact of regulatory policy. ...  If the regulators suspend mark-to-market, investors won’t trust the banks. Of course, they don’t trust the banks now, so there’s nothing lost. Suspending mark-to-market would have to be combined with some of the measures already in place, e.g. guarantees against default for a certain percentage of assets on banks’ books, and guarantees for some of their new debt (although Goldman, Sachs managed to issue debt on Friday at around 500 bps above the Treasury curve without a guarantee). If AAA subprime bonds are trading in the $50s and actually are worth in the $60s or $70s, then providing a guarantee at $50 should cost the government nothing.

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