The Bad Bank Plan Is Taking Shape

The first act by the new Treasury Secretary Tim Geithner seems to be the creation of a huge new “bad bank” to buy toxic assets and dispose of them. This how the Wall Street Journal describes the plan:

“By creating a “bad bank,” the government would essentially buy up those assets to get them off the banks’ books. That would ostensibly strengthen bank balance sheets because the financial institutions wouldn’t be burdened by the deteriorating value of those assets. The government would then bear that burden and potentially sell the assets back into the market when buyers eventually re-emerge.”

I doubt if Secretary Geithner has the moxie to tell Congress and President Obama just how much this “Zombie bank” will cost. Realistically, with toxic assets still rising, the Treasury will have to spend $3 trillion on toxic debt this year.

To convince Congress to spend the trillions of dollars, Geithner will likely tell Congress that the Treasury will take additional preferred or common stock from the banks in exchange for buying these toxic assets. Under the terms of the Troubled Asset Relief Program (TARP), if the Treasury Department cannot be paid back in five years, the preferred stock converts to common stock via warrants. That means the U.S. is effectively following Britain’s bank nationalization, but in slow motion.

More Louis Navellier

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